gecc10k123107.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

     
 
FORM 10-K
  

(Mark One)
        
þ
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2007
or
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ___________to ___________
_____________________________
 
Commission file number 1-6461
_____________________________
 
General Electric Capital Corporation
(Exact name of registrant as specified in its charter)

 
Delaware
  
13-1500700
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
3135 Easton Turnpike, Fairfield, Connecticut
  
06828
  
203/373-2211
(Address of principal executive offices)
  
(Zip Code)
  
(Registrant’s telephone number,
including area code)
Securities Registered Pursuant to Section 12(b) of the Act: 
Title of each class
  
Name of each exchange
on which registered
     
6.625% Public Income Notes Due June 28, 2032
  
New York Stock Exchange
6.10% Public Income Notes Due November 15, 2032
  
New York Stock Exchange
5.875% Notes Due February 18, 2033
  
New York Stock Exchange
Step-Up Public Income Notes Due January 28, 2035
  
New York Stock Exchange
6.45% Notes Due June 15, 2046
  
New York Stock Exchange
6.00% Public Income Notes Due April 24, 2047
  
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
 
Title of each class
  
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨ 
Accelerated filer ¨
Non-accelerated filer þ
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
Aggregate market value of the outstanding common equity held by nonaffiliates of the registrant as of the last business day of the registrant’s recently completed second fiscal quarter: None.
 
At February 19, 2008, 3,985,403 shares of voting common stock, which constitute all of the outstanding common equity, with a par value of $14 were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The consolidated financial statements of General Electric Company, set forth in the Annual Report on Form 10-K of General Electric Company for the year ended December 31, 2007, are incorporated by reference into Part IV hereof.
 
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.
 

 
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TABLE OF CONTENTS
   
   
Page
   
PART I
    
     
Business
3
Risk Factors
7
Unresolved Staff Comments
9
Properties
9
Legal Proceedings
9
Submission of Matters to a Vote of Security Holders
11
     
PART II
    
     
Market for Registrant’s Common Equity, Related Stockholder Matters and
  
 
Issuer Purchases of Equity Securities
12
Selected Financial Data
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
Quantitative and Qualitative Disclosures About Market Risk
37
Financial Statements and Supplementary Data
38
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
82
Controls and Procedures
82
Other Information
83
     
PART III
    
     
Directors, Executive Officers and Corporate Governance
83
Executive Compensation
83
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
83
Certain Relationships and Related Transactions, and Director Independence
83
Principal Accounting Fees and Services
83
     
PART IV
    
     
Exhibits, Financial Statement Schedules
84
 
Signatures 
  

 

 
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PART I
 
 
Item 1. Business.
 
General Electric Capital Corporation
 
General Electric Capital Corporation (GE Capital or GECC) was incorporated in 1943 in the State of New York under the provisions of the New York Banking Law relating to investment companies, as successor to General Electric Contracts Corporation, which was formed in 1932. Until November 1987, our name was General Electric Credit Corporation. On July 2, 2001, we changed our state of incorporation to Delaware. All of our outstanding common stock is owned by General Electric Capital Services, Inc. (GE Capital Services or GECS), formerly General Electric Financial Services, Inc., the common stock of which is in turn wholly-owned, directly or indirectly, by General Electric Company (GE Company or GE). Financing and services offered by GE Capital are diversified, a significant change from the original business of GE Capital, which was, financing distribution and sale of consumer and other GE products. Currently, GE manufactures few of the products financed by GE Capital.
 
We operate in three of GE’s operating segments described below. These operations are subject to a variety of regulations in their respective jurisdictions. Our services are offered primarily in North America, Europe and Asia.
 
Our principal executive offices are located at 3135 Easton Turnpike, Fairfield, CT, 06828-0001. At December 31, 2007, our employment totaled approximately 80,500.
 
Our financial information, including filings with the U.S. Securities and Exchange Commission (SEC), is available at www.ge.com/secreports. Copies are also available, without charge, from GE Corporate Investor Communications, 3135 Easton Turnpike, Fairfield, CT, 06828-0001. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. References to our website addressed in this report are provided as a convenience and do not constitute, or should be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
 
Operating Segments
 
For purposes of our segment discussions throughout this document, certain financial services businesses including Aviation Financial Services, Energy Financial Services and Transportation Finance are reported in the GE Infrastructure segment because GE Infrastructure actively manages such businesses and reports their results for internal performance measurement purposes. Although management’s approach to segments combines industrial businesses with financial services businesses, the financial services businesses will continue to be reported in the GECC financial statements. We will herein provide business descriptions for these specific financial services businesses. We will also continue our longstanding practice of providing supplemental information for certain businesses within the segments.
 
During the fourth quarter of 2007, we transferred the Equipment Services business from the GE Industrial segment to the GE Commercial Finance segment, where a portion of the business is reported in Capital Solutions.
 

 
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GE Commercial Finance
 
GE Commercial Finance (49.6%, 52.0% and 51.9% of total GECC revenues in 2007, 2006 and 2005, respectively) offers a broad range of financial services worldwide. We have particular mid-market expertise and offer loans, leases and other financial services to customers, including manufacturers, distributors and end-users for a variety of equipment and major capital assets. These assets include industrial-related facilities and equipment; commercial and residential real estate; vehicles; corporate aircraft; and equipment used in many industries, including the construction, manufacturing, transportation, telecommunications and healthcare industries.
 
During 2007, we made a number of acquisitions, the most significant of which were Trustreet Properties, Inc., Diskont und Kredit AG and Disko Leasing GmbH (DISKO) and ASL Auto Service-Leasing GmbH (ASL), the leasing businesses of KG Allgemeine Leasing GmbH & Co., and Sanyo Electric Credit Co., Ltd.
 
We operate in a highly competitive environment. Our competitors include commercial banks, investment banks, leasing companies, financing companies associated with manufacturers, and independent finance companies. Competition related to our lending and leasing operations is based on price, that is interest rates and fees, as well as deal structure and terms. Profitability is affected not only by broad economic conditions that affect customer credit quality and the availability and cost of capital, but also by successful management of credit risk, operating risk and market risks such as interest rate and currency exchange risks. Success requires high quality risk management systems, customer and industry specific knowledge, diversification, service and distribution channels, strong collateral and asset management knowledge, deal structuring expertise and the ability to reduce costs through technology and productivity.
 
Our headquarters are in Norwalk, Connecticut with offices throughout North America, South America, Europe, Australia and Asia.
 
For further information about revenues, segment profit and total assets for GE Commercial Finance, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
Capital Solutions
 
Capital Solutions offers a broad range of financial services worldwide, and has particular mid-market expertise, offering loans, leases, inventory finance, transport solutions and other financial services to customers, including manufacturers, dealers and end-users for a variety of equipment and major capital assets. These assets include retail facilities; vehicles; corporate aircraft; and equipment used in many industries, including the construction, transportation, technology, and manufacturing industries.
 
Real Estate
 
Real Estate offers a comprehensive range of capital and investment solutions, including equity capital for acquisition or development, as well as fixed and floating rate mortgages for new acquisitions or re-capitalizations of commercial real estate worldwide. Our business finances, with both equity and loan structures, the acquisition, refinancing and renovation of office buildings, apartment buildings, retail facilities, parking facilities and industrial properties. Our typical real estate loans are intermediate term, may be either senior or subordinated, fixed or floating-rate, and are secured by existing income-producing commercial properties. Certain of our originations of low loan-to-value loans are conducted for term securitization within one year; certain of our equity investments, including properties we
 

 
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acquire for investment, are sold under favorable market conditions. We invest in, and provide restructuring financing for, portfolios of mortgage loans, limited partnerships and tax-exempt bonds.
 
In the normal course of our business operations, we sell certain real estate equity investments when it is economically advantageous for us to do so. However, as real estate values are affected by certain forces beyond our control (e.g., market fundamentals and demographic conditions), it is difficult to predict with certainty the level of future sales or sales prices. Rental income generally approximates operating expenses, which include depreciation and amortization.
 
GE Money
 
GE Money (37.2%, 34.3% and 33.2% of total GECC revenues in 2007, 2006 and 2005, respectively) is a leading provider of financial services to consumers and retailers in over 50 countries around the world. We offer a full range of innovative financial products to suit customers’ needs. These products include private-label credit cards; personal loans; bank cards; auto loans and leases; mortgages; debt consolidation; home equity loans; corporate travel and purchasing cards; deposit and other savings products; small and medium enterprise lending; and credit insurance on a global basis. In September 2007, we committed to a plan to sell our Japanese personal loan business (Lake) and in December 2007, we sold our U.S. mortgage business (WMC).
 
In 2007, as part of our continued global expansion, we made a number of acquisitions, the most significant of which was a 33% stake in Bank of Ayudhya and private label credit card portfolios of Chevron and Lowe’s.
 
Our operations are subject to a variety of bank and consumer protection regulations. Further, a number of countries have ceilings on rates chargeable to consumers in financial service transactions. We are subject to competition from various types of financial institutions including commercial banks, leasing companies, consumer loan companies, independent finance companies, manufacturers’ captive finance companies, and insurance companies. Industry participants compete on the basis of price, servicing capability, promotional marketing, risk management, and cross selling. The markets in which we operate are also subject to the risks from fluctuations in retail sales, interest and currency exchange rates, and the consumer’s capacity to repay debt.
 
Our headquarters are currently in Stamford, Connecticut and our operations are located in North America, South America, Europe, Australia and Asia. In February 2008, we announced that we will move our headquarters to London, England.
 
For further information about revenues, segment profit and total assets for GE Money, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
GE Infrastructure
 
GE Infrastructure (10.8%, 10.4% and 9.8% of total GECC revenues in 2007, 2006 and 2005, respectively) is one of the world’s leading providers of essential technologies to developed, developing and emerging countries. Through products and services in aviation, energy, oil and gas, transportation, and water and process technologies, GE is helping to develop the infrastructure of countries all over the world. GE Infrastructure also provides aviation financing as well as energy and water investing, lending and leasing.
 
Our operations are located in North America, Europe, Asia and South America.
 

 
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For further information about revenues and segment profit for GE Infrastructure, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
Aviation Financial Services
 
Aviation Financial Services is a global commercial aviation financial services business that offers a broad range of financial products to airlines, aircraft operators, owners, lenders, investors and airport developers. Financial products include leases, aircraft purchasing and trading, loans, engine/spare parts financing, fleet planning and financial advisory services. We operate in a highly competitive environment. Our competitors include aircraft manufacturers, banks, financial institutions, and other finance and leasing companies. Competition is based on lease rates and terms, as well as aircraft delivery dates, condition and availability.
 
Energy Financial Services
 
Energy Financial Services offers structured equity, debt, leasing, partnership financing, project finance and broad-based commercial finance to the global energy and water industries and invests in operating assets in these industries. During 2007, we acquired a controlling interest in Regency Energy Partners LP, a midstream master limited partnership engaged in the gathering, processing, transporting and marketing of natural gas and gas liquids. We operate in a highly competitive environment. Our competitors include banks, financial institutions, energy and water companies, and other finance and leasing companies. Competition is primarily based on price, that is interest rates and fees, as well as deal structure and terms. As we compete globally, our success is sensitive to the economic and political environment of each country in which we do business.
 
Discontinued Operations
 
Discontinued operations includes the results of Lake; WMC; GE Life, our U.K.-based life insurance operation; and Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations.
 
For further information about Discontinued Operations, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 2.
 
Regulations and Competition
 
Our activities are subject to a variety of U.S. federal and state regulations including, at the federal level, the Consumer Credit Protection Act, the Equal Credit Opportunity Act and certain regulations issued by the Federal Trade Commission. A majority of states have ceilings on rates chargeable to customers on retail loan transactions, installment loans and revolving credit financing. Our insurance activities are regulated by various state insurance commissions and non-U.S. regulatory authorities. We are a unitary diversified savings and loan holding company by virtue of owning a federal savings bank in the U.S.; as such, we are subject to holding company supervision by the Office of Thrift Supervision. Our global operations are subject to regulation in their respective jurisdictions. To date, compliance with such regulations has not had a material adverse effect on our financial position or results of operations.
 
The businesses in which we engage are highly competitive. We are subject to competition from various types of financial institutions, including banks, thrifts, investment banks, broker-dealers, credit unions, leasing
 

 
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companies, consumer loan companies, independent finance companies, finance companies associated with manufacturers and insurance and reinsurance companies.
 
Business and Economic Conditions
 
Our businesses are generally affected by general business and economic conditions in countries in which we conduct business. When overall economic conditions deteriorate in those countries, there generally are adverse effects on our operations, although those effects are dynamic and complex. For example, a downturn in employment or economic growth in a particular national or regional economy will generally increase the pressure on customers, which generally will result in deterioration of repayment patterns and a reduction in the value of collateral. However, in such a downturn, demand for loans and other products and services we offer may actually increase. Interest rates, another macro-economic factor, are important to our businesses. In the lending and leasing businesses, higher real interest rates increase our cost to borrow funds, but also provide higher levels of return on new investments. For our operations, such as the insurance activities, that are linked less directly to interest rates, rate changes generally affect returns on investment portfolios.
 
Forward-Looking Statements
 
This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could adversely or positively affect our future results include: the behavior of financial markets, including fluctuations in interest and exchange rates and commodity and equity prices; the commercial and consumer credit environment; the impact of regulation and regulatory, investigative and legal actions; strategic actions, including acquisitions and dispositions; future integration of acquired businesses; future financial performance of major industries which we serve, including, without limitation, the air and rail transportation, energy generation, media, real estate and healthcare industries; and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements.
 
 
Item 1A. Risk Factors.
 
The following discussion of risk factors contains “forward-looking statements,” as discussed in Item 1. These risk factors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with Management’s Discussion and Analysis (MD&A), and the consolidated financial statements and related notes included in this report.
 
Our businesses routinely encounter and address risks, some of which will cause our future results to be different – sometimes materially different – than we presently anticipate. Discussion about important operational risks that our businesses encounter can be found in the MD&A section and in the business descriptions included in Item 1. Business of this Form 10-K. Below, we have described certain important strategic risks. Our reactions to material future developments as well as our competitors’ reactions to those developments will determine our future results.
 

 
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Our global growth is subject to a number of economic and political risks
 
We conduct our operations in virtually every part of the world. Global economic developments affect businesses such as ours in many ways. Operations are subject to the effects of global competition. Our global business is affected by local economic environments, including inflation, recession and currency volatility. Political changes, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location. While some of these risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful.
 
Our credit ratings are important to our cost of capital
 
The major debt agencies routinely evaluate our debt and have given their highest debt ratings to us. This evaluation is based upon a number of factors, which include financial strength, as well as transparency with rating agencies and timeliness of financial reporting. One of our strategic objectives is to maintain our “Triple A” ratings as they serve to lower our borrowing costs and facilitate our access to a variety of lenders. Failure to maintain our Triple A debt ratings could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.
 
The success of our business depends on achieving our objectives for strategic acquisitions and dispositions
 
With respect to acquisitions and mergers, we may not be able to identify suitable candidates at terms acceptable to us, or may not achieve expected returns and other benefits as a result of integration challenges, such as personnel and technology. We will continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives, or we may dispose of a business at a price or on terms, which are less than we had anticipated. In addition, there is a risk that we sell a business whose subsequent performance exceeds our expectations, in which case our decision would have potentially sacrificed enterprise value. Correspondingly, we may be too optimistic about a particular business’s prospects, in which case we may be unable to find a buyer at a price acceptable to us and therefore may have potentially sacrificed enterprise value.
 
We are subject to a wide variety of laws and regulations
 
Our businesses are subject to regulation by U.S. federal and state laws and foreign laws, regulations and policies. Changes to laws or regulations may even require us to modify our business objectives if existing practices become more restricted, subject to escalating costs or prohibited outright. Particular risks include regulatory risks arising from local laws, such as laws that reduce the allowable lending rate or limit consumer borrowing, from local liquidity regulations that may increase the risks of not being able to retrieve assets, and changes to tax law that may affect our return on investments. For example, our effective tax rate is reduced because active business income earned and indefinitely reinvested outside the United States is taxed at less than the U.S. rate. A significant portion of this reduction depends upon a provision of U.S. tax law that defers the imposition of U.S. tax on certain active financial services income until that income is repatriated to the United States as a dividend. This provision is consistent with international tax norms and permits U.S. financial services companies to compete more effectively with foreign banks and other foreign financial institutions in global markets. This provision, which is scheduled to expire at the end of 2008, has been scheduled to expire on four previous occasions, and each time it has been extended by Congress. If this provision is not extended, the current U.S. tax imposed on active financial services income earned outside the United States would increase, making it more difficult for U.S. financial services companies to compete in global markets. Our businesses and the industries in which we operate are also at times
 

 
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being reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages.
 
Changes in the real estate markets are highly uncertain
 
We provide financing for the acquisition, refinancing and renovation of various types of properties. We also consider opportunities to buy and sell properties which may result in significant outlays or proceeds of cash, either individually or in the aggregate. The profitability of real estate investments is largely dependent upon the specific geographic market in which they are located and the perceived value of that market at the time of sale. We may have difficulty optimizing that mix and such activity may vary significantly from one year to the next.
 
 
Item 1B. Unresolved Staff Comments.
 
Not applicable.
 
 
Item 2. Properties.
 
We conduct our business from various facilities, most of which are leased. The locations of our primary facilities are described in Item 1. Business.
 
 
Item 3. Legal Proceedings.
 
As previously reported, in January 2005 the staff of the U.S. Securities and Exchange Commission (SEC) informed us that it had commenced an investigation and requested certain documents and information with respect to the use of hedge accounting for derivatives by GE and GE Capital. In August 2005 the SEC staff advised GE that the SEC had issued a formal order of investigation in the matter. The SEC staff has taken testimony in this matter and has requested information about other GE accounting policies and practices, including items related to revenue recognition.
 
In connection with the SEC’s investigation, GE is conducting an internal review of revenue recognition matters. GE’s review has been thorough and extensive, continuing for more than a year, and has been conducted using substantial internal and external resources. These resources have included extensive redeployment of GE’s 430 person audit staff to focus on this review; substantial time and resources of GE’s controllership and finance organizations and GE’s internal legal organization; accounting and expert support from our auditor, KPMG; and extensive resources from outside legal counsel and accounting expertise, who have advised GE and its audit committee. GE has regularly reported results of the review to the SEC staff as conclusions have been reached and in cases where errors have been identified, GE has publicly disclosed them in its filings with the SEC.
 
In a Form 8-K filed January 18, 2008, GE reported that it had determined that it made an error in the manner in which it changed its accounting for profits on certain aftermarket spare parts. As GE reported, under long-term product services agreements, GE provides repair and maintenance for installed products, including spare parts. GE recognizes revenue and profits over the contract period in proportion to GE’s contract costs. An element of its contract costs is the cost of spare parts. Before January 1, 2002, GE’s Aviation business accounted for the profits on spare parts installed pursuant to long-term product service agreements either in its spare parts unit or in its revenue recognition model for commercial engines. Effective January 1, 2002, with the concurrence of KPMG, GE changed
 

 
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its accounting for spare parts in two ways that largely offset: to exclude all spare parts from the model for engine sales and to include margin in long-term services agreements to the extent spare parts are associated with such agreements.
 
In making this change, GE changed its estimate of the unperformed portions of long-term product services agreements to use its cost instead of catalogue list price. GE has determined that because it did not also re-compute its pre-2002 spare parts costs on the same basis, it overestimated the percentage of completion of affected agreements and underestimated the related contract profit rates, an error that resulted in accelerating revenues and profits attributable to such agreements in 2002 and understating revenues and profits in some future periods. Similar adjustments in the accounting method for estimating the cost of spare parts installed pursuant to long-term services agreements were made by Aviation in 2003 with respect to spare parts manufactured by a joint venture partner and in GE’s Energy business in 2006. GE also reported that it had determined that for periods prior to 2004, it made an error in its application and description of appropriate revenue measurement principles in certain Infrastructure businesses. GE’s associated routines and controls failed to prevent or detect these errors.
 
GE and its audit committee, with the assistance of the committee’s independent counsel, have evaluated the circumstances surrounding and the effect on its previously reported financial statements of the items reported in its January 18, 2008 Form 8-K, and have determined that the adjustments relating to these items, both individually and together with the adjustments for the errors identified in its Form 10-Qs filed on July 27, 2007 and November 2, 2007, are not material to its financial statements and have determined that restatement of its prior period financial statements is not required. GE has included the adjustments for these items in prior period financial information reported in its Form 10-K.
 
GE also has considered these matters in context of its review of its internal control over financial reporting and has concluded that the internal control deficiencies implicated by the items identified above constitute significant deficiencies in its internal control over financial reporting, but do not (individually or in the aggregate with other identified deficiencies) constitute a material weakness in GE’s internal control.
 
GE and its audit committee take these internal control matters very seriously and are committed to continuing to improve its internal control processes and procedures. In response to these matters, GE and its audit committee have been actively engaged in the planning and implementation of remediation efforts to address the identified deficiencies in its internal controls with respect to its revenue recognition policies and procedures, and to enhance its overall control environment. GE has already undertaken, and is continuing to implement, a number of remedial actions and internal control enhancements:
 
·  
Strengthening its expertise and technical controllership resources in corporate accounting and its internal audit staff devoted to complex accounting matters;
 
·  
Implementing improved procedures for its corporate accounting and internal audit staff for review of accounting for unusual transactions;
 
·  
Enhancing its operational controllership resources, structure and processes to oversee GE businesses to better ensure controllership policies are fully executed;
 
·  
Enhancing and clarifying its global accounting policies and procedures for revenue recognition and its related training programs and communication;
 

 
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·  
Improving the processes and procedures around documentation of critical accounting areas and judgments and accounting changes, and enhancing communication of these matters to senior management and GE’s audit committee;
 
·  
Continuing to stress leadership communication about integrity, accuracy and transparency; and
 
·  
Evaluating responsibility, where errors have occurred, with respect to the employees involved in the transactions related to such errors and making appropriate personnel determinations based on such evaluations.
 
GE and GE Capital continue to cooperate with the ongoing SEC investigation and to discuss the investigation and issues arising in that investigation and our internal review with the SEC staff with a goal of completing our review and resolving these matters as soon as practicable. Senior management and GE’s audit committee are monitoring the review closely with the assistance of outside counsel and accounting experts. We and GE’s audit committee are committed to addressing issues that arise and to providing transparent disclosure to our investors concerning these matters.
 
The Antitrust Division of the Department of Justice (DOJ) and the SEC are continuing to conduct an industry-wide investigation of marketing and sales of guaranteed investment contracts, and other financial instruments, to municipalities. In connection with this investigation, two subsidiaries of GE Capital received subpoenas in 2006: GE Funding CMS (Trinity Funding Co.) received a subpoena from the DOJ requesting documents and GE Funding Capital Market Services, Inc. received a subpoena from the SEC that requests similar information about Trinity Funding Company, LLC. The Company is cooperating fully with the SEC and DOJ in this matter.
 
 
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
Not required by this form.
 

 
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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities.
 
See note 15 to the consolidated financial statements. Our common stock is owned entirely by GE Capital Services and, therefore, there is no trading market in such stock.
 
 
Item 6. Selected Financial Data.
 
The following selected financial data should be read in conjunction with our financial statements and the related Notes to Consolidated Financial Statements.
 
(In millions)
2007
  
2006
  
2005
  
2004
  
2003
  
                               
Revenues
$
67,249
  
$
57,757
  
$
51,379
  
$
47,859
  
$
40,404
  
Earnings from continuing operations
                              
before accounting changes
  
11,957
    
10,131
    
8,503
    
7,615
    
6,004
  
Earnings (loss) from discontinued operations,
                              
net of taxes
  
(2,142
)
  
255
    
1,423
    
975
    
1,780
  
Earnings before accounting changes
  
9,815
    
10,386
    
9,926
    
8,590
    
7,784
  
Net earnings
  
9,815
    
10,386
    
9,926
    
8,590
    
7,445
  
Shareowner’s equity
  
61,230
    
56,585
    
50,190
    
54,038
    
46,722
  
Short-term borrowings
  
186,770
    
168,894
    
149,671
    
147,281
    
146,850
  
Long-term borrowings
  
309,233
    
256,807
    
206,191
    
201,373
    
162,524
  
Return on average shareowner’s equity(a)
  
20.4
%
  
19.3
%
  
17.4
%
  
16.8
%
  
14.6
%
Ratio of earnings to fixed charges
  
1.56
    
1.63
    
1.67
    
1.83
    
1.73
  
Ratio of debt to equity
  
8.10:1
    
7.52:1
    
7.09:1
    
6.45:1
    
6.62:1
  
Financing receivables – net
$
380,004
  
$
323,943
  
$
278,614
  
$
272,687
  
$
238,958
  
Total assets
  
620,386
    
543,665
    
475,259
    
566,984
    
506,778
  
                               

(a)
Represents earnings from continuing operations before accounting changes divided by average total shareowner’s equity, excluding effects of discontinued operations (on an annual basis, calculated using a five-point average). Average total shareowner’s equity, excluding effects of discontinued operations, as of the end of each of the years in the five-year period ended December 31, 2007, is described in the Supplemental Information section.
  
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Operations
 
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in the Supplemental Information section.
 
We present Management’s Discussion of Operations in four parts: Overview of Our Earnings from 2005 through 2007, Global Risk Management, Segment Operations and Geographic Operations. Unless otherwise indicated, we refer to captions such as revenues and earnings from continuing operations simply as “revenues” and “earnings” throughout this Management’s Discussion and Analysis. Similarly, discussion of other matters in our consolidated financial statements relates to continuing operations unless otherwise indicated.
 

 
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Overview of Our Earnings from 2005 through 2007
 
Our results for the last three years reflect our strategy to strengthen our position as a worldwide growth company operating in diverse industries in which we maintain strong market-leader positions. During these three years, we increased revenues through organic growth and reallocated resources from nonstrategic operations to businesses that provide higher returns. As a result, over the last three years our revenues grew 31% and earnings, 41%. At December 31, 2007, we owned 1,479 commercial aircraft, of which all but five were on lease, and we held $20.0 billion (list price) of multiple-year orders for various Boeing, Airbus and other aircraft, including 75 aircraft ($5.1 billion list price) scheduled for delivery in 2008, all under agreement to commence operations with commercial airline customers. Emerging markets continued to provide us opportunities to grow as evidenced by a 41% increase in global revenues during this period. We also experienced a weaker U.S. dollar and rising energy cost during this period.
 
Our debt continues to receive the highest ratings of the major rating agencies and has allowed us to consistently fund our operations in an efficient manner even through this difficult credit environment.
 
The information that follows will show how our global diversification and risk management strategies have helped us to grow revenues and earnings. We also believe that the disposition of our less strategic businesses, our restructuring actions and our investment in businesses with strong growth potential position us well for the future.
 
GE Commercial Finance (51% and 48% of total three-year revenues and total segment profit, respectively) is a large, profitable growth business in which we continue to invest with confidence. In a competitive environment, this business grew earnings by $0.6 billion and $0.8 billion in 2007 and 2006, respectively, and has delivered strong results through solid core growth, disciplined risk management and successful acquisitions. The most significant acquisitions affecting GE Commercial Finance results in 2007 were the custom fleet business of National Australia Bank Ltd.; Sanyo Electric Credit Co., Ltd.; and Diskont und Kredit AG and Disko Leasing GmbH (DISKO) and ASL Auto Service-Leasing GmbH (ASL), the leasing businesses of KG Allgemeine Leasing GmbH & Co. These acquisitions collectively contributed $1.4 billion and $0.2 billion to 2007 revenues and net earnings, respectively. During the first half of 2007, GE Commercial Finance faced margin compression as a decline in market risk premiums for new financing opportunities outpaced the decline in cost of our investment grade debt. In the second half of 2007, GE Commercial Finance was able to capitalize on markets in transition, using its size, liquidity and financial flexibility for opportunistic originations, taking advantage of the liquidity conditions with which certain competitors contended. GE Commercial Finance is well positioned for growth in 2008 and beyond.
 
GE Money (35% and 33% of total three-year revenues and total segment profit, respectively) continues to succeed despite the slowing U.S. economy, tightening credit conditions and limited liquidity. GE Money grew earnings by $1.0 billion and $0.7 billion in 2007 and 2006, respectively, and has delivered strong results through solid core growth, disciplined risk management and successful acquisitions. In mid-2007, as a result of pressures in the U.S. subprime mortgage industry, GE Money decided to sell its U.S. mortgage business (WMC). This liquidity-challenged environment in which GE Money operates continues to cause issues for some of its U.S. customers, and U.S. delinquencies increased in 2007. In response, GE Money tightened underwriting standards related to the U.S. consumer. GE Money will continue its process of regularly reviewing and adjusting reserve levels in response to when it is probable that losses have been incurred in the portfolio.
 
Overall, acquisitions contributed $3.6 billion, $2.0 billion and $2.8 billion to total revenues in 2007, 2006 and 2005, respectively. Our earnings included approximately $0.2 billion, $0.3 billion and $0.3 billion in 2007, 2006 and 2005, respectively, from acquired businesses. We integrate acquisitions as quickly as possible. Only revenues
 

 
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and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. Dispositions also affected our ongoing results through lower revenues of $2.8 billion, $0.5 billion and $1.4 billion in 2007, 2006 and 2005, respectively. This resulted in lower earnings of $0.1 billion in 2007 and 2006, compared with $0.4 billion in 2005.
 
Significant matters relating to our Statement of Earnings are explained below.
 
Discontinued Operations
 
In December 2007, we completed the exit of WMC as a result of continued pressures in the U.S. subprime mortgage industry. In September 2007, we committed to a plan to sell our Japanese personal loan business (Lake). We made the decision to sell this business upon determining that, despite restructuring, Japanese regulatory limits for interest charges on unsecured personal loans did not permit us to earn an acceptable return. We are actively pursuing a buyer and expect to complete the sale of this business by the end of the third quarter of 2008. Both of these businesses were previously reported in the GE Money segment.
 
In 2006, we substantially completed our planned exit of the insurance businesses through the sale of GE Life, our U.K.-based life insurance operation, to Swiss Reinsurance Company (Swiss Re), and the sale, through a secondary public offering, of our remaining 18% investment in Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations.
 
We reported the businesses described above as discontinued operations for all periods presented.
 
Interest on borrowings amounted to $22.3 billion, $17.5 billion and $13.8 billion in 2007, 2006 and 2005, respectively. Changes over the three-year period reflected increased average borrowings and increased interest rates attributable to rising credit spreads in line with general market conditions. Our average borrowings were $448.2 billion, $381.5 billion and $338.1 billion in 2007, 2006 and 2005, respectively. Our average composite effective interest rate was 5.0% in 2007, 4.6% in 2006 and 4.1% in 2005. Proceeds of these borrowings were used in part to finance asset growth and acquisitions. In 2007, our average assets of $572.4 billion were 19% higher than in 2006, which in turn were 10% higher than in 2005. See the Financial Resources and Liquidity section for a discussion of interest rate risk management.
 
Income taxes are a significant cost. As a global commercial enterprise, our tax rates are affected by many factors, including our global mix of earnings, legislation, acquisitions, dispositions and tax characteristics of our income. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions.
 
Our effective tax rate was 5.6% in 2007, compared with 10.4% in 2006 and 10.2% in 2005. Our income tax rate decreased from 2006 to 2007 as the tax benefit on the disposition of our investment in SES and growth in lower-taxed global earnings, which decreased our effective tax rate 4.3 and 2.3 percentage points, respectively, were partially offset by the absence of the 2006 benefit of the reorganization, discussed below, of our aircraft leasing business which increased the rate 1.2 percentage points.
 
Our 2006 rate was about the same as 2005 as a smaller benefit on the reorganization of our aircraft leasing business was substantially offset by higher net tax expense related to U.S. and non-U.S. audit activity, increased benefits from growth in lower-taxed earnings from global operations and the disposal of an investment in an
 

 
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associated company. The lower benefits on the reorganization of our aircraft leasing business (2.3 percentage points) and the increased benefits from lower-taxed earnings from global operations (0.4 percentage point) are included in the line, “Tax on global activities including exports” in note 13.
 
As a result of the repeal of the extraterritorial income (ETI) taxing regime as part of the American Jobs Creation Act of 2004 (the Act), our aircraft leasing business no longer qualifies for a reduced U.S. tax rate. However, the Act also extended to aircraft leasing the U.S. tax deferral benefits that were already available to other GE non-U.S. active operations. These legislative changes, coupled with a reorganization of our aircraft leasing business and a favorable Irish ruling, decreased our effective tax rate 1.2 percentage points in 2006, compared with 3.5 percentage points in 2005.
 
Global Risk Management
 
A disciplined approach to risk is important in a diversified organization such as ours in order to ensure that we are executing according to our strategic objectives and that we only accept risk for which we are adequately compensated. It is necessary for us to manage risk at the individual transaction level, and to consider aggregate risk at the customer, industry, geographic and collateral-type levels, where appropriate.
 
Our Board of Directors oversees the risk management process, and approves all significant acquisitions and dispositions as well as borrowings and investments. All participants in the risk management process must comply with approval limits established by the Board.
 
The Chief Risk Officer is responsible, with the Corporate Risk Function, for establishing standards for the measurement, reporting and limiting of risk; for managing and evaluating risk managers; for approving risk management policies; and for reviewing major risk exposures and concentrations across the organization. Our Corporate Risk Function analyzes certain business risks and assesses them in relation to aggregate risk appetite and approval limits set by our Board of Directors.
 
Threshold responsibility for identifying, quantifying and mitigating risks is assigned to our individual businesses. We employ proprietary analytic models to allocate capital to our financing activities, to identify the primary sources of risk and to measure the amount of risk we will take for each product line. This approach allows us to develop early signals that monitor changes in risk affecting portfolio performance and actively manage the portfolio. Other corporate functions such as Financial Planning and Analysis, Treasury, Legal and our Corporate Audit Staff support business-level risk management. Businesses that, for example, hedge financial risk with derivative financial instruments must do so using our centrally managed Treasury function, providing assurance that the business strategy complies with our corporate policies and achieves economies of scale. We review risks periodically with business-level risk managers, senior management and our Board of Directors.
 
We employ about 19,000 dedicated risk professionals, including 11,500 involved in collection activities and 500 specialized asset managers who evaluate leased asset residuals and remarket off-lease equipment.
 
We manage a variety of risks including liquidity, credit and market risks.
 
•
Liquidity risk is the risk of being unable to accommodate liability maturities, fund asset growth and meet contractual obligations through access to funding at reasonable market rates. Additional information about our liquidity and how we manage this risk can be found in the Financial Resources and Liquidity section and in notes 11 and 18.
 

 
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•
Credit risk is the risk of financial loss arising from a customer or counterparty failure to meet its contractual obligations. We face credit risk in our investing, lending and leasing activities (see the Financial Resources and Liquidity and Critical Accounting Estimates sections and notes 1, 5, 6, 7 and 20) and derivative financial instruments activities (see note 18).
 
•
Market risk is the potential loss in value of investment and other asset and liability portfolios, including financial instruments and residual values of leased assets. This risk is caused by changes in market variables, such as interest and currency exchange rates and equity and commodity prices. We are exposed to market risk in the normal course of our business operations as a result of our ongoing investing and funding activities. Additional information can be found in the Financial Resources and Liquidity section and in notes 5, 6, 8 and 18.
 
Other risks include natural disasters, availability of necessary materials, guarantees of product performance and business interruption. These types of risks are often insurable, and success in managing these risks is ultimately determined by the balance between the level of risk retained or assumed and the cost of transferring risk to others.
 
Segment Operations
 
Operating segments comprise our three businesses focused on the broad markets they serve: GE Commercial Finance, GE Money and GE Infrastructure. For segment reporting purposes, certain financial services businesses including Aviation Financial Services, Energy Financial Services and Transportation Finance are reported in the GE Infrastructure segment because GE Infrastructure actively manages such businesses and reports their results for internal performance measurement purposes.
 
GECC corporate items and eliminations include the effects of eliminating transactions between operating segments; results of our insurance activities remaining in continuing operations; underabsorbed corporate overhead; certain non-allocated amounts determined by the Chief Executive Officer; and a variety of sundry items. GECC corporate items and eliminations is not an operating segment. Rather, it is added to operating segment totals to reconcile to consolidated totals on the financial statements.
 
The Chief Executive Officer allocates resources to, and assesses the performance of operations at the consolidated GE-level. GECC operations are a portion of those segments. We present below in their entirety the three GE segments that include financial services operations. We also provide a one-line reconciliation to GECC-only results, the most significant component of which is the elimination of GE businesses that are not financial services businesses. In addition to providing information on GE segments in their entirety, we have also provided supplemental information for certain businesses within the GE segments. Our Chief Executive Officer does not separately assess the performance of, or allocate resources among, these product lines.
 
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business in a given period. In connection with that assessment, the Chief Executive Officer may exclude matters such as charges for restructuring; rationalization and other similar expenses; in-process research and development and certain other acquisition-related charges and balances; technology and product development costs; certain gains and losses from dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team.
 
Segment profit always excludes the effects of principal pension plans, results reported as discontinued operations and accounting changes. Segment profit excludes or includes interest and other financial charges and
 

 
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income taxes according to how a particular segment’s management is measured – excluded in determining segment profit, which we sometimes refer to as “operating profit,” for GE Healthcare, GE NBC Universal, GE Industrial and the industrial businesses of the GE Infrastructure segment; included in determining segment profit, which we sometimes refer to as “net earnings,” for GE Commercial Finance, GE Money, and the financial services businesses of the GE Infrastructure segment (Aviation Financial Services, Energy Financial Services and Transportation Finance).
 
We have reclassified certain prior-period amounts to conform to the current period’s presentation. For additional information about our segments, see Item 1, Business and note 17.
 
Summary of Operating Segments
 
(In millions)
2007
  
2006
  
2005
  
             
Revenues
                  
GE Commercial Finance(a)
$
34,288
  
$
30,853
  
$
27,273
  
GE Money
  
25,019
    
19,783
    
17,072
  
GE Infrastructure
  
57,925
    
46,965
    
41,695
  
Total segment revenues
  
117,232
    
97,601
    
86,040
  
GECC corporate items and eliminations
  
1,661
    
1,929
    
2,608
  
Total revenues
  
118,893
    
99,530
    
88,648
  
Less portion of GE revenues not included in GECC
  
(51,644
)
  
(41,773
)
  
(37,269
)
Total revenues in GECC
$
67,249
  
$
57,757
  
$
51,379
  
                   
Segment profit
                  
GE Commercial Finance(a)
$
6,039
  
$
5,297
  
$
4,487
  
GE Money
  
4,280
    
3,267
    
2,527
  
GE Infrastructure
  
10,810
    
8,848
    
7,711
  
Total segment profit
  
21,129
    
17,412
    
14,725
  
GECC corporate items and eliminations(b)
  
192
    
55
    
305
  
Less portion of GE segment profit not included in GECC
  
(9,364
)
  
(7,336
)
  
(6,527
)
Earnings in GECC from continuing operations
  
11,957
    
10,131
    
8,503
  
Earnings (loss) in GECC from discontinued operations, net of taxes
  
(2,142
)
  
255
    
1,423
  
Total net earnings in GECC
$
9,815
  
$
10,386
  
$
9,926
  
                   

(a)
During the fourth quarter of 2007, we transferred the Equipment Services business from the GE Industrial segment to the GE Commercial Finance segment, where a portion of the business is reported in Capital Solutions.
  
(b)
Included restructuring and other charges for 2007 of $0.4 billion related to GE Commercial Finance ($0.3 billion), primarily business exits and GE Money ($0.1 billion), primarily portfolio exits.
  

See accompanying notes to consolidated financial statements.
  

 

 
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GE Commercial Finance
 
(In millions)
2007
  
2006
  
2005
  
                   
Revenues
$
34,288
  
$
30,853
  
$
27,273
  
Less portion of GE Commercial Finance not included in GECC
  
(954
)
  
(810
)
  
(632
)
Total revenues in GECC
$
33,334
  
$
30,043
  
$
26,641
  
                   
Segment profit
$
6,039
  
$
5,297
  
$
4,487
  
Less portion of GE Commercial Finance not included in GECC
  
(436
)
  
(293
)
  
(301
)
Total segment profit in GECC
$
5,603
  
$
5,004
  
$
4,186
  
                   
                   
December 31 (In millions)
2007
  
2006
        
                   
Total assets
$
310,412
  
$
252,901
        
Less portion of GE Commercial Finance not included in GECC
  
(3,453
)
  
3,689
        
Total assets in GECC
$
306,959
  
$
256,590
        
                   
                   
(In millions)
2007
  
2006
  
2005
  
                   
Revenues in GE
                  
Capital Solutions
$
14,354
  
$
14,169
  
$
13,162
  
Real Estate
  
7,021
    
5,020
    
3,492
  
                   
Segment profit in GE
                  
Capital Solutions
$
1,889
  
$
1,789
  
$
1,522
  
Real Estate
  
2,285
    
1,841
    
1,282
  
                   
                   
December 31 (In millions)
2007
  
2006
        
                   
Assets in GE
                  
Capital Solutions
$
122,527
  
$
100,882
        
Real Estate
  
79,285
    
53,786
        

 
GE Commercial Finance 2007 revenues and net earnings increased 11% and 14%, respectively, compared with 2006. Revenues in 2007 and 2006 included $2.4 billion and $0.1 billion from acquisitions, respectively, and in 2007 were reduced by $2.7 billion as a result of dispositions. Revenues in 2007 also increased $3.7 billion as a result of organic revenue growth ($2.7 billion) and the weaker U.S. dollar ($1.0 billion). The increase in net earnings resulted from core growth ($0.5 billion), acquisitions ($0.2 billion), the weaker U.S. dollar ($0.1 billion), and investment income ($0.1 billion), partially offset by dispositions ($0.1 billion) and lower securitization income ($0.1 billion). Core growth included $0.5 billion representing the total year’s tax benefit on the disposition of our investment in SES, partially offset by $0.2 billion of higher credit losses and $0.1 billion in charges related to mark-to-market adjustments to loans held-for-sale. Investment income included higher SES gains ($0.1 billion) offset by impairments of securitization retained interests ($0.1 billion).
 
Real Estate assets at December 31, 2007, increased $25.5 billion, or 47%, from December 31, 2006, of which $12.6 billion was real estate investments, also up 47%. Real Estate net earnings increased 24% compared with 2006, primarily as a result of a $0.5 billion increase in net earnings from sales of real estate investments.
 

 
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GE Commercial Finance 2006 revenues and net earnings increased 13% and 18%, respectively, compared with 2005. Revenues in 2006 and 2005 included $1.2 billion and $0.1 billion from acquisitions, respectively, and in 2006 were reduced by $0.1 billion as a result of dispositions. Revenues in 2006 also increased as a result of organic revenue growth ($2.5 billion) and the second quarter 2006 consolidation of GE SeaCo, an entity previously accounted for using the equity method ($0.2 billion). The increase in net earnings resulted from core growth ($0.7 billion), including growth in lower-taxed earnings from global operations, and acquisitions ($0.1 billion).
 
Real Estate assets at December 31, 2006, increased $18.5 billion, or 52%, from December 31, 2005, of which $12.4 billion was real estate investments, up 76%. Real Estate net earnings increased 44% compared with 2005, primarily as a result of a $0.6 billion increase in net earnings from real estate investments.
 
GE Money
 
(In millions)
2007
  
2006
  
2005
  
             
Revenues
$
25,019
  
$
19,783
  
$
17,072
  
Less portion of GE Money not included in GECC
  
–
    
–
    
–
  
Total revenues in GECC
$
25,019
  
$
19,783
  
$
17,072
  
                   
Segment profit
$
4,280
  
$
3,267
  
$
2,527
  
Less portion of GE Money not included in GECC
  
(47
)
  
(54
)
  
3
  
Total segment profit in GECC
$
4,233
  
$
3,213
  
$
2,530
  
                   
                   
December 31 (In millions)
2007
  
2006
        
                   
Total assets
$
210,952
  
$
179,284
        
Less portion of GE Money not included in GECC
  
100
    
955
        
Total assets in GECC
$
211,052
  
$
180,239
        

 
GE Money 2007 revenues and net earnings increased 26% and 31%, respectively, compared with 2006. Revenues in 2007 included $0.4 billion from acquisitions. Revenues in 2007 also increased $4.8 billion as a result of organic revenue growth ($3.5 billion) and the weaker U.S. dollar ($1.4 billion). The increase in net earnings resulted primarily from core growth ($0.4 billion), higher securitization income ($0.4 billion) and the weaker U.S. dollar ($0.2 billion). Core growth included growth in lower-taxed earnings from global operations ($0.4 billion) and the sale of part of our Garanti investment ($0.2 billion), partially offset by declines in fair value of retained interests in securitizations ($0.1 billion) and lower results in the U.S. reflecting the effects of higher delinquencies.
 
GE Money 2006 revenues and net earnings increased 16% and 29%, respectively, compared with 2005. Revenues in 2006 included $0.9 billion from acquisitions. Revenues in 2006 also increased $1.8 billion as a result of organic revenue growth. The increase in net earnings resulted primarily from core growth ($0.5 billion), including growth in lower-taxed earnings from global operations, acquisitions ($0.2 billion) and higher securitizations ($0.1 billion).
 

 
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GE Infrastructure
 
(In millions)
2007
  
2006
  
2005
  
                   
Revenues
$
57,925
  
$
46,965
  
$
41,695
  
Less portion of GE Infrastructure not included in GECC
  
(50,690
)
  
(40,963
)
  
(36,637
)
Total revenues in GECC
$
7,235
  
$
6,002
  
$
5,058
  
                   
Segment profit
$
10,810
  
$
8,848
  
$
7,711
  
Less portion of GE Infrastructure not included in GECC
  
(8,881
)
  
(6,989
)
  
(6,229
)
Total segment profit in GECC
$
1,929
  
$
1,859
  
$
1,482
  
                   
Revenues in GE
                  
Aviation
$
16,819
  
$
13,017
  
$
11,826
  
Aviation Financial Services
  
4,605
    
4,177
    
3,504
  
Energy
  
21,825
    
18,793
    
16,501
  
Energy Financial Services
  
2,405
    
1,664
    
1,349
  
Oil & Gas
  
6,849
    
4,340
    
3,598
  
Transportation
  
4,523
    
4,159
    
3,577
  
                   
Segment profit in GE
                  
Aviation
$
3,222
  
$
2,802
  
$
2,525
  
Aviation Financial Services
  
1,155
    
1,108
    
764
  
Energy
  
3,824
    
2,906
    
2,662
  
Energy Financial Services
  
724
    
695
    
646
  
Oil & Gas
  
860
    
548
    
411
  
Transportation
  
936
    
774
    
524
  

 
GE Infrastructure revenues rose 23%, or $11.0 billion, in 2007 on higher volume ($7.9 billion), higher prices ($1.1 billion) and the effects of the weaker U.S. dollar ($0.8 billion) at the industrial businesses in the segment. The increase in volume reflected the effects of acquisitions at Aviation and Oil & Gas and increased sales of commercial engines and services at Aviation, thermal and wind equipment at Energy, and equipment and services at Oil & Gas and Transportation. The increase in price was primarily at Energy and Aviation, while the effects of the weaker U.S. dollar were primarily at Oil & Gas and Energy. Revenues also increased as a result of acquisitions ($0.7 billion) and organic revenue growth ($0.6 billion), primarily at Energy Financial Services and Aviation Financial Services.
 
Segment profit rose 22% to $10.8 billion in 2007, compared with $8.8 billion in 2006, as higher volume ($1.3 billion), higher prices ($1.1 billion), productivity ($0.1 billion), the effects of the weaker U.S. dollar ($0.1 billion) and higher sales of minority interests in engine programs ($0.1 billion) more than offset the effects of higher material and other costs ($0.9 billion) at the industrial businesses in the segment. The increase in volume primarily related to Aviation, Energy and Oil & Gas. Segment profit from the financial services businesses increased $0.1 billion, primarily as a result of core growth at Aviation Financial Services.
 
GE Infrastructure revenues rose 13%, or $5.3 billion, in 2006 on higher volume ($4.4 billion), higher prices ($0.3 billion) and the effects of late 2006 weakening of the U.S. dollar ($0.1 billion) at the industrial businesses in the segment. The increase in volume reflected increased sales of power generation equipment at Energy, commercial and military services and commercial engines at Aviation, equipment at Oil & Gas, and locomotives at Transportation. The increase in price was primarily at Energy and Transportation. Revenues also increased as a result of organic revenue growth at Aviation Financial Services ($0.7 billion) and Energy Financial Services ($0.3
 

 
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billion). Intra-segment revenues, which increased $0.5 billion, were eliminated from total GE Infrastructure revenues.
 
Segment profit rose 15% to $8.8 billion in 2006, compared with $7.7 billion in 2005, as higher volume ($0.6 billion), higher prices ($0.3 billion) and productivity ($0.3 billion) more than offset the effects of higher material and other costs ($0.4 billion) at the industrial businesses in the segment. The increase in volume primarily related to Aviation, Energy, Transportation and Oil & Gas. Segment profit from the financial services businesses increased as a result of core growth at Aviation Financial Services ($0.3 billion), including growth in lower-taxed earnings from global operations that were more than offset by lower one-time benefits from our aircraft leasing business reorganization, and core growth at Energy Financial Services.
 
GE Infrastructure orders were $64.4 billion in 2007, up from $51.0 billion in 2006. The $58.5 billion total backlog at year-end 2007 comprised unfilled product orders of $44.4 billion (of which 61% was scheduled for delivery in 2008) and product services orders of $14.1 billion scheduled for 2008 delivery. Comparable December 31, 2006, total backlog was $39.2 billion, of which $27.0 billion was for unfilled product orders and $12.2 billion, for product services orders.
 
Discontinued Operations
 
(In millions)
2007
  
2006
  
2005
  
                   
Earnings (loss) in GECC from discontinued operations, net of taxes
$
(2,142
)
$
255
  
$
1,423
  

 
Discontinued operations comprised Lake; WMC; GE Life, our U.K.-based life insurance operation; and Genworth, our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations. Results of these businesses are reported as discontinued operations for all periods presented.
 
In December 2007, we completed the sale of our WMC business for $0.1 billion in cash, recognizing an after-tax loss of $0.1 billion. In connection with the transaction, certain contractual obligations and potential liabilities related to previously sold loans were retained.
 
In September 2007, we committed to a plan to sell our Lake business. In connection with this exit, we recorded an after-tax loss of $0.9 billion, which represents the difference between the net book value of our Lake business and the projected sale price.
 
Loss from discontinued operations, net of taxes, in 2007 was $2.1 billion, reflecting a loss from operations at WMC ($0.9 billion), an estimated after-tax loss on the planned sale of Lake ($0.9 billion), a loss from operations at Lake ($0.3 billion), and an after-tax loss on sale of our WMC business ($0.1 billion), partially offset by a tax adjustment related to the 2004 initial public offering of Genworth ($0.1 billion).
 
Earnings from discontinued operations, net of taxes, in 2006 were $0.3 billion, reflecting earnings at Lake and WMC ($0.2 billion) and Genworth ($0.2 billion), partially offset by a loss at GE Life ($0.2 billion).
 
Earnings from discontinued operations, net of taxes, in 2005 were $1.4 billion, reflecting earnings at Genworth ($0.9 billion) and Lake and WMC ($0.5 billion).
 

 
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For additional information related to discontinued operations, see note 2.
 
Geographic Operations
 
Our global activities span all geographic regions and primarily encompass leasing of aircraft and provision of financial services within these regional economies. Thus, when countries or regions experience currency and/or economic stress, we often have increased exposure to certain risks, but also often have new profit opportunities. Potential increased risks include, among other things, higher receivable delinquencies and bad debts, delays or cancellations of sales and orders principally related to aircraft equipment, higher local currency financing costs and slowdown in our established activities. New profit opportunities include, among other things, more opportunities for lower cost outsourcing, expansion of our activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs.
 
Revenues are classified according to the region to which products and services are sold. For purposes of this analysis, U.S. is presented separately from the remainder of the Americas. We classify certain operations that cannot meaningfully be associated with specific geographic areas as “Other Global” for this purpose.
 
Global revenues rose 29% to $36.4 billion in 2007, compared with $28.2 billion and $25.8 billion in 2006 and 2005, respectively. Global revenues as a percentage of total revenues were 54% in 2007, compared with 49% and 50% in 2006 and 2005, respectively.
 
Revenues in the Middle East and Africa grew 37% in 2007, primarily as a result of organic revenue growth at GE Infrastructure. Revenues grew 35% in the Pacific Basin, 28% in Europe and 20% in the Americas in 2007, primarily as a result of organic revenue growth, acquisitions and the effects of the weaker U.S. dollar, primarily at GE Commercial Finance and GE Money.
 
Our global assets on a continuing basis of $363.6 billion at the end of 2007 were 21% higher than at the end of 2006, reflecting core growth, acquisitions and the effects of the weaker U.S. dollar in Europe, the Pacific Basin and the Americas, primarily at GE Commercial Finance and GE Money.
 
Financial results of our global activities reported in U.S. dollars are affected by currency exchange. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Such principal currencies are the pound sterling, the euro, the Japanese yen and the Canadian dollar.
 
Financial Resources and Liquidity
 
This discussion of financial resources and liquidity addresses the Statement of Financial Position, the Statement of Changes in Shareowner’s Equity, the Statement of Cash Flows, Contractual Obligations, Off-Balance Sheet Arrangements, and Debt Instruments, Guarantees and Covenants.
 
Overview of Financial Position
 
Major changes in our financial position resulted from the following:
 
·
During 2007, we separately reported the assets and liabilities of Lake and WMC as discontinued operations for all periods presented. As of December 31, 2007, we have completed the sale of WMC, reducing assets and liabilities of discontinued operations by $4.5 billion and $0.1 billion, respectively.
 

 
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·
During 2007, we completed the acquisitions of Sanyo Electric Credit Co., Ltd.; DISKO and ASL, the leasing businesses of KG Allgemeine Leasing GmbH & Co.; Trustreet Properties, Inc.; Dundee REIT; Crow Holdings; and a controlling interest in Regency Energy Partners LP.
 
·
The U.S. dollar was weaker at December 31, 2007, than it was at December 31, 2006, increasing the translated levels of our non-U.S. dollar assets and liabilities. Overall, on average, the U.S. dollar in 2007 was weaker than during the comparable 2006 period, resulting in increasing the translated levels of our operations as noted in the preceding Operations section.
 
Statement of Financial Position
 
Investment securities comprise mainly investment-grade debt securities supporting obligations to holders of guaranteed investment contracts (GICs). Investment securities were $20.7 billion at December 31, 2007, compared with $21.3 billion at December 31, 2006. Of the amount at December 31, 2007, we held mortgage-backed securities (MBS) and asset-backed securities (ABS) with estimated fair values of $6.0 billion and $1.8 billion, respectively. Such amounts included unrealized losses of $0.2 billion and $0.1 billion, respectively. Of the MBS amount, $4.3 billion related to residential MBS and $1.7 billion to commercial MBS.
 
At December 31, 2007 and 2006, we had approximately $1.5 billion of exposure to subprime credit supporting our guaranteed investment contracts, a majority of which relates to residential MBS receiving credit ratings of Double A or better from the major rating agencies. We purchased an insignificant amount of such securities in 2007. Our subprime investment securities were collateralized primarily by pools of individual, direct mortgage loans, not other structured products such as collateralized debt obligations.
 
Monoline insurers (Monolines) provide credit enhancement for certain of our investment securities. The current credit environment could have a significant effect on the ability of such financial guarantors to fulfill their obligations. At December 31, 2007, our investment securities insured by Monolines amounted to $3.1 billion, including $1.2 billion of our $1.5 billion investment in subprime residential MBS.
 
We regularly review investment securities for impairment using both quantitative and qualitative criteria. Quantitative criteria include length of time and amount that each security is in an unrealized loss position and, for fixed maturities, whether the issuer is in compliance with terms and covenants of the security. Qualitative criteria include the financial health of and specific prospects for the issuer, as well as our intent and ability to hold the security to maturity or until forecasted recovery. Our impairment reviews involve our finance, risk and asset management functions as well as the portfolio management and research capabilities of our internal and third-party asset managers. Our qualitative review attempts to identify issuers’ securities “at-risk” of impairment, that is, with a greater than 50% chance of default in the following 12 months. At December 31, 2007, investment securities in an unrealized loss position included $0.1 billion that was at risk of being charged to earnings in the next 12 months.
 
Impairment losses were insignificant in 2007 compared with $0.1 billion in 2006. We recognized impairments in both periods on securities of issuers in a variety of industries; we do not believe that any of the impairments indicate likely future impairments in the remaining portfolio. Investments in retained interests in off-balance sheet arrangements at GE Money also decreased by $0.1 billion during 2007, reflecting declines in fair value accounted for in accordance with a new accounting standard that became effective at the beginning of 2007.
 

 
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Gross unrealized gains and losses totaled $0.4 billion and $0.6 billion, respectively, at December 31, 2007, compared with $0.9 billion and $0.1 billion, respectively, at December 31, 2006, primarily reflecting a decrease caused by sale of certain equity securities, and a decrease in estimated fair values of MBS and U.S. corporate debt securities. At December 31, 2007, available 2008 accounting gains could be as much as $0.4 billion, net of consequential adjustments to certain insurance assets that are amortized based on anticipated gross profits. The market values we used in determining unrealized gains and losses are those defined by relevant accounting standards and are not a forecast of future gains or losses. We presently intend to hold our investment securities that are in an unrealized loss position at December 31, 2007, at least until we can recover their respective amortized cost and we have the ability to hold our debt securities until their maturities. See note 5.
 
Financing receivables is our largest category of assets and represents one of our primary sources of revenues. The portfolio of financing receivables, before allowance for losses, was $384.3 billion at December 31, 2007, and $327.9 billion at December 31, 2006. The related allowance for losses at December 31, 2007, amounted to $4.3 billion, compared with $3.9 billion at December 31, 2006, representing our best estimate of probable losses inherent in the portfolio. The 2007 increase reflected overall growth in our portfolio, increased delinquencies in the U.S. at GE Money, and the weaker U.S. dollar, primarily at GE Money; partially offset by continued strong credit quality at GE Commercial Finance. Balances at December 31, 2007 and 2006, included securitized, managed GE trade receivables of $6.2 billion and $6.0 billion, respectively.
 
A discussion of the quality of certain elements of the financing receivables portfolio follows. For purposes of that discussion, “delinquent” receivables are those that are 30 days or more past due; and “nonearning” receivables are those that are 90 days or more past due (or for which collection has otherwise become doubtful).
 
GE Commercial Finance financing receivables, before allowance for losses, totaled $182.4 billion at December 31, 2007, compared with $149.6 billion at December 31, 2006, and consisted of loans and financing leases to the equipment, commercial and industrial, and real estate industries. This portfolio of receivables increased primarily from core growth ($61.7 billion), acquisitions ($14.3 billion), and the weaker U.S. dollar ($5.7 billion), partially offset by securitizations and sales ($46.8 billion). Related nonearning receivables were $1.7 billion (0.9% of outstanding receivables) at December 31, 2007, and $1.6 billion (1.1% of outstanding receivables) at year-end 2006. GE Commercial Finance financing receivables are generally backed by assets and there is a broad spread of geographic and credit risk in the portfolio.
 
GE Money financing receivables, before allowance for losses, were $174.8 billion at December 31, 2007, compared with $150.4 billion at December 31, 2006, and consisted primarily of card receivables, installment loans, auto loans and leases, and residential mortgages. This portfolio of receivables increased primarily as a result of core growth ($15.0 billion), the weaker U.S. dollar ($9.8 billion) and acquisitions ($1.4 billion), partially offset by loans transferred to assets held for sale ($1.0 billion) and dispositions ($1.0 billion). Related nonearning receivables were $3.7 billion at December 31, 2007, compared with $3.2 billion at December 31, 2006, both representing 2.1% of outstanding receivables. The increase was primarily related to the weaker U.S. dollar at the end of the year and overall growth in the portfolio.
 
GE Infrastructure financing receivables, before allowance for losses, were $22.0 billion at December 31, 2007, compared with $21.0 billion at December 31, 2006, and consisted primarily of loans and leases to the commercial aircraft and energy industries. Related nonearning receivables were insignificant at December 31, 2007 and 2006.
 

 
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Other financing receivables, before allowance for losses, were $5.1 billion and $6.9 billion at December 31, 2007, and December 31, 2006, respectively, and consisted primarily of financing receivables in consolidated, liquidating securitization entities. This portfolio of receivables decreased because we have stopped transferring assets to these entities. Related nonearning receivables at December 31, 2007, were $0.1 billion (1.4% of outstanding receivables) compared with $0.1 billion (1.2% of outstanding receivables) at December 31, 2006.
 
Delinquency rates on managed GE Commercial Finance equipment loans and leases and managed GE Money financing receivables follow.
 
December 31
2007
    
2006
    
2005
    
                   
GE Commercial Finance
1.21
%
  
1.22
%
  
1.31
%
  
GE Money
5.36
    
5.21
    
5.34
    
U.S.
5.52
    
4.93
    
5.00
    
Non-U.S.
5.30
    
5.32
    
5.47
    

 
Delinquency rates at GE Commercial Finance decreased from December 31, 2005, through December 31, 2007, reflecting continued strong credit quality.
 
Delinquency rates at GE Money increased from December 31, 2006, to December 31, 2007, primarily as a result of the deteriorating consumer credit environment in the U.S. At December 31, 2007, approximately one-third of our U.S.-managed portfolio, which consisted of credit card, installment and revolving loans, was receivable from subprime borrowers. We had no U.S. subprime residential mortgage loans at December 31, 2007. The U.S. experience had not affected our non-U.S. portfolios at December 31, 2007; those delinquency rates remained fairly stable. See notes 6 and 7.
 
Other receivables totaled $28.7 billion at December 31, 2007, and $35.9 billion at December 31, 2006, and consisted primarily of amounts due from GE (generally related to certain material procurement programs), nonfinancing customer receivables, amounts due under operating leases, receivables due on sale of securities and various sundry items.
 
Property, plant and equipment amounted to $63.7 billion at December 31, 2007, up $5.8 billion from 2006, primarily reflecting acquisitions and additions of commercial aircraft at the Aviation Financial Services business of GE Infrastructure and fleet vehicles at GE Commercial Finance. Property, plant and equipment consisted primarily of equipment provided to third parties on operating leases. Details by category of investment are presented in note 8. Additions to property, plant and equipment were $15.0 billion and $12.9 billion during 2007 and 2006, respectively, primarily reflecting acquisitions and additions of vehicles at GE Commercial Finance and commercial aircraft at the Aviation Financial Services business of GE Infrastructure.
 
Goodwill and other intangible assets amounted to $25.3 billion and $4.1 billion, respectively, at December 31, 2007. Goodwill increased $2.7 billion and other intangible assets increased $1.4 billion from 2006, primarily from acquisitions – including DISKO and ASL, Sanyo Electric Credit Co., Ltd. and Trustreet Properties, Inc. by GE Commercial Finance – and from the weaker U.S. dollar. See note 9.
 
Other assets totaled $82.5 billion at year-end 2007, an increase of $24.0 billion, reflecting increases from additional investments and acquisitions in real estate, increases in associated companies and assets held for sale. See note 10.
 

 
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Borrowings amounted to $496.0 billion at December 31, 2007, of which $186.8 billion is due in 2008 and $309.2 billion is due in subsequent years. Comparable amounts at the end of 2006 were $425.7 billion in total, $168.9 billion due within one year and $256.8 billion due thereafter. The increase in borrowings primarily resulted from new issuances of long-term debt ($90.3 billion), the weaker U.S. dollar ($15.8 billion), acquisitions ($11.0 billion) and increase in short-term borrowings ($5.0 billion), partially offset by maturities and other redemptions of long-term debt ($47.2 billion). Included in our total borrowings were borrowings of consolidated, liquidating securitization entities amounting to $9.3 billion and $11.1 billion at December 31, 2007 and 2006, respectively. A large portion of our borrowings ($95.4 billion and $86.5 billion at the end of 2007 and 2006, respectively) was issued in active unsecured commercial paper markets that we believe will continue to be a reliable source of short-term financing. The average remaining terms and interest rates of our commercial paper were 56 days and 4.79% at the end of 2007, compared with 48 days and 5.09% at the end of 2006. Our ratio of debt to equity was 8.10 to 1 at the end of 2007 and 7.52 to 1 at the end of 2006. See note 11.
 
Exchange rate and interest rate risks are managed with a variety of techniques, including match funding and selective use of derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse markets around the world and local funding is not always efficient. In addition, we use derivatives to adjust the debt we are issuing to match the fixed or floating nature of the assets we are acquiring. We apply strict policies to manage each of these risks, including prohibitions on derivatives trading, derivatives market-making or other speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange rates using so-called “shock” tests that model effects of shifts in rates. These are not forecasts.
 
•
It is our policy to minimize exposure to interest rate changes. We fund our financial investments using debt or a combination of debt and hedging instruments so that the interest rates and terms of our borrowings match the expected yields and terms on our assets. To test the effectiveness of our positions, we assumed that, on January 1, 2008, interest rates increased by 100 basis points across the yield curve (a “parallel shift” in that curve) and further assumed that the increase remained in place for 2008. We estimated, based on the year-end 2007 portfolio and holding everything else constant, that our 2008 net earnings would decline by $0.1 billion.
 
•
It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection of hedge strategies. We analyzed year-end 2007 consolidated currency exposures, including derivatives designated and effective as hedges, to identify assets and liabilities denominated in other than their relevant functional currencies. For such assets and liabilities, we then evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. This analysis indicated that there would be an inconsequential effect on 2008 earnings of such a shift in exchange rates.
 

 
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Statement of Changes in Shareowner’s Equity
 
Shareowner’s equity increased by $4.6 billion and $6.4 billion in 2007 and 2006, respectively, and decreased by $3.8 billion in 2005. Changes over the three-year period were largely attributable to net earnings, partially offset by dividends declared of $6.9 billion, $8.3 billion and $8.6 billion in 2007, 2006 and 2005, respectively. In 2006, shareowner’s equity increased as a result of a capital contribution from GECS of $1.9 billion. Preferred stock redemptions reduced shareowner’s equity by $0.1 billion and $2.5 billion in 2006 and 2005, respectively. Currency translation adjustments increased equity by $2.6 billion in 2007 and $2.5 billion in 2006, compared with a $2.5 billion decrease in 2005. Changes in currency translation adjustments reflect the effects of changes in currency exchange rates on our net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar. During 2007 and 2006, the U.S. dollar weakened against the pound sterling and euro, after strengthening in 2005. The U.S. dollar was also weaker against the Japanese yen in 2007, after strengthening in 2006 and 2005. See note 15.
 
Overview of Our Cash Flow from 2005 through 2007
 
Our cash and equivalents aggregated $8.6 billion at the end of 2007, compared with $9.7 billion at year-end 2006. Over the past three years, our borrowings with maturities of 90 days or less have increased by $7.1 billion. New borrowings of $248.0 billion having maturities longer than 90 days were added during those years, while $150.4 billion of such long-term borrowings were retired.
 
Our principal use of cash has been investing in assets to grow our businesses. Of the $142.3 billion that we invested over the past three years, $99.8 billion was used for additions to financing receivables; $39.1 billion was used to invest in new equipment, principally for lease to others; and $22.0 billion was used for acquisitions of new businesses, the largest of which were Sanyo Electric Credit Co., Ltd.; DISKO and ASL, the leasing businesses of KG Allgemeine Leasing GmbH & Co.; Trustreet Properties, Inc.; Dundee REIT; Crow Holdings; and a controlling interest in Regency Energy Partners LP in 2007; Banque Artesia Nederland N.V., a subsidiary of Dexia Group; Arden Realty, Inc.; the custom fleet business of National Australia Bank Ltd. and the senior housing portfolios of Formation Capital LLC in 2006; and the Transportation Financial Services Group of CitiCapital and the Inventory Finance division of Bombardier Capital in 2005.
 
Based on past performance and current expectations, in combination with the financial flexibility that comes with a strong balance sheet and the highest credit ratings, we believe that we are in a sound position to grow dividends and continue making selective investments for long-term growth.
 

 
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Contractual Obligations
 
As defined by reporting regulations, our contractual obligations for future payments as of December 31, 2007, follow.
 
 
Payments due by period
  
(In billions)
Total
  
2008
  
2009-2010
  
2011-2012
  
2013 and
thereafter
  
                     
Borrowings (note 11)
$
496.0
  
$
186.8
    
$
118.1
      
$
71.7
      
$
119.4
    
                                           
Interest on borrowings
  
145.0
    
22.0
      
32.0
        
19.0
        
72.0
    
                                           
Operating lease obligations (note 4)
  
3.7
    
0.8
      
1.2
        
0.7
        
1.0
    
                                           
Purchase obligations(a)(b)
  
39.0
    
23.0
      
9.0
        
7.0
        
−
    
                                           
Insurance liabilities (note 12)(c)
  
12.0
    
1.0
      
4.0
        
1.0
        
6.0
    
                                           
Other liabilities(d)
  
21.0
    
18.0
      
1.0
        
–
        
2.0
    
                                           
Contractual obligations of
                                          
discontinued operations(e)
  
1.0
    
1.0
      
–
        
–
        
–
    
                                           

(a)
Included all take-or-pay arrangements, capital expenditures, contractual commitments to purchase equipment that will be leased to others, software acquisition/license commitments and any contractually required cash payments for acquisitions.
  
(b)
Excluded funding commitments entered into in the ordinary course of business. Further information on these commitments and other guarantees is provided in note 20.
  
(c)
Included guaranteed investment contracts.
  
(d)
Included an estimate of future expected funding requirements related to our pension benefit plans. Because their future cash outflows are uncertain, the following non-current liabilities are excluded from the table above: deferred taxes, derivatives, deferred revenue and other sundry items. See notes 13 and 18 for further information on certain of these items.
  
(e)
Included payments for other liabilities.
  

 
Off-Balance Sheet Arrangements
 
Our securitization activity is primarily transacted through special purpose vehicles funded in the asset-backed commercial paper and term bond markets. The assets that we securitize include receivables secured by equipment, commercial and residential real estate, credit card receivables, trade receivables and other assets originated and underwritten by us in the normal course of business. At December 31, 2007, off-balance sheet securitization entities held $50.5 billion in financial assets, up $9.7 billion during the year. Assets held by these entities are underwritten based on the same criteria as our on-book assets. We monitor the underlying credit quality in accordance with our servicing role and apply rigorous controls to the execution of securitization. Based on our experience, we believe that, under any plausible future economic scenario, the likelihood is remote that the financial support arrangement we provide to securitization entities could have a material adverse effect on our financial position or results of operations. Investors in these entities usually have recourse to the underlying assets. In addition, we provide credit enhancements, most often by retaining a subordinated interest; the carrying value of our retained interests was $4.3 billion at December 31, 2007, up $1.9 billion during the year. We recognized insignificant impairment losses on retained interests in both 2007 and 2006. Investments in retained interests at GE Money also decreased by $0.1 billion during 2007, reflecting declines in fair value accounted for in accordance with a new accounting standard
 

 
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that became effective at the beginning of 2007. We have also entered into other various credit enhancement positions with these securitization entities, including liquidity and credit support agreements and guarantee and reimbursement contracts, and have provided our best estimate of the fair value of estimated losses on such positions. The estimate of fair value is based on prevailing market conditions at December 31, 2007. Should market conditions deteriorate, actual losses could be higher. Our exposure to loss under such agreements was limited to $2.8 billion at December 31, 2007.
 
Debt Instruments, Guarantees and Covenants
 
The major debt rating agencies routinely evaluate our debt. These agencies have given us the highest debt ratings (long-term rating AAA/Aaa; short-term rating A-1+/P-1). One of our strategic objectives is to maintain these ratings, as they serve to lower our cost of funds and to facilitate our access to a variety of lenders. We manage our businesses in a fashion that is consistent with maintaining these ratings.
 
We have distinct business characteristics that the major debt rating agencies evaluate both quantitatively and qualitatively.
 
Quantitative measures include:
 
•
Earnings and profitability, revenue growth, the breadth and diversity of sources of income and return on assets
 
•
Asset quality, including delinquency and write-off ratios and reserve coverage
 
•
Funding and liquidity, including cash generated from operating activities, leverage ratios such as debt-to-capital, market access, back-up liquidity from banks and other sources, composition of total debt and interest coverage
 
•
Capital adequacy, including required capital and tangible leverage ratios
 
Qualitative measures include:
 
•
Franchise strength, including competitive advantage and market conditions and position
 
•
Strength of management, including experience, corporate governance and strategic thinking
 
•
Financial reporting quality, including clarity, completeness and transparency of all financial performance communications
 
Our ratings are supported contractually by a GE commitment to maintain the ratio of earnings to fixed charges at a specified level as described below.
 
During 2007, we paid $1.8 billion of special dividends to GECS, which was funded by the proceeds of the sale of GE Life.
 
During 2007, GECC and GECC affiliates issued $84.6 billion of senior, unsecured long-term debt and $5.7 billion of subordinated debt. This debt was both fixed and floating rate and was issued to institutional and retail investors in the U.S. and 17 other global markets. Maturities for these issuances ranged from one to 60 years. We
 

 
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used the proceeds primarily for repayment of maturing long-term debt, but also to fund acquisitions and organic growth. We anticipate that we will issue approximately $80 billion of long-term debt during 2008. The ultimate amount we issue will depend on our needs and on market conditions.
 
We target a ratio for commercial paper not to exceed 35% of outstanding debt based on the anticipated composition of our assets and the liquidity profile of our debt. GE Capital is the most widely held name in global commercial paper markets.
 
We continue to believe that alternative sources of liquidity are sufficient to permit an orderly transition from commercial paper in the unlikely event of impaired access to those markets. Funding sources on which we would rely would depend on the nature of such a hypothetical event, but include $64.8 billion of contractually committed lending agreements with 72 highly-rated global banks and investment banks. Total credit lines extending beyond one year increased $5.0 billion to $64.8 billion at December 31, 2007. See note 11.
 
Beyond contractually committed lending agreements, other sources of liquidity include medium and long-term funding, monetization, asset securitization, cash receipts from our lending and leasing activities, short-term secured funding on global assets and potential sales of other assets.
 
Principal debt conditions are described below.
 
The following conditions relate to GECC:
 
•
Swap, forward and option contracts are required to be executed under standard master-netting agreements containing mutual downgrade provisions that provide the ability of the counterparty to require assignment or termination if the long-term credit rating of GECC were to fall below A-/A3. Our related obligation, net of master-netting agreements would have been $2.8 billion at December 31, 2007.
 
•
If our ratio of earnings to fixed charges, which was 1.56:1 at the end of 2007, were to deteriorate to 1.10:1, GE has committed to contribute capital to us. GE also guaranteed certain issuances of our subordinated debt having a face amount of $0.5 billion at December 31, 2007 and 2006.
 
•
In connection with certain subordinated debentures for which GECC receives equity credit by rating agencies, GE has agreed to forego dividends, distributions or other payments from GECC during events of default or interest extensions under such subordinated debentures. There were $8.1 billion of such debentures outstanding at December 31, 2007.
 
The following conditions relate to consolidated entities:
 
•
If our short-term credit rating or certain consolidated entities discussed further in note 19 were to be reduced below A-1/P-1, we would be required to provide substitute liquidity for those entities or provide funds to retire the outstanding commercial paper. The maximum net amount that we would be required to provide in the event of such a downgrade is determined by contract, and amounted to $7.2 billion at January 1, 2008.
 
•
One group of consolidated entities holds high quality investment securities funded by the issuance of GICs. If our long-term credit rating were to fall below AA-/Aa3 or our short-term credit rating were to fall below A-1+/P-1, we could be required to provide up to $6.2 billion of capital to such entities.
 

 
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In our history, we have never violated any of the above conditions. We believe that under any reasonable future economic developments, the likelihood that any such arrangements could have a significant effect on our operations, cash flows or financial position is remote.
 
Critical Accounting Estimates
 
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Also see note 1, Summary of Significant Accounting Policies, which discusses the significant accounting policies that we have selected from acceptable alternatives.
 
Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. Such estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values, and the present and expected future levels of interest rates. Our risk management process, which includes standards and policies for reviewing major risk exposures and concentrations, ensures that relevant data are identified and considered either for individual loans or financing leases, or on a portfolio basis, as appropriate.
 
Our lending and leasing experience and the extensive data we accumulate and analyze facilitate estimates that have proven reliable over time. Our actual loss experience was in line with expectations for 2007, 2006 and 2005. While GE Commercial Finance continues to experience strong credit quality, we currently expect higher delinquencies in the GE Money U.S. portfolio.
 
Further information is provided in the Financial Resources and Liquidity – Financing Receivables section, the Asset impairment section that follows and in notes 1, 6 and 7.
 
Asset impairment assessment involves various estimates and assumptions as follows:
 
Investments. We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of that market decline, our intent and ability to hold to maturity or until forecasted recovery, and the financial health of and specific prospects for the issuer. We perform comprehensive market research and analysis and monitor market conditions to identify potential impairments.
 
At December 31, 2007, our investment in preferred and common stock, $0.3 billion and $0.1 billion, respectively, of FGIC Corporation (FGIC), a monoline credit insurer, was accounted for on the cost method and was in an insignificant unrealized loss position. See note 10. During 2008, credit rating agencies downgraded FGIC; following the downgrades, various alternative outcomes were possible. We continue to monitor this investment closely, including review for impairment.
 
Further information about actual and potential impairment losses is provided in the Financial Resources and Liquidity – Investment Securities section and in notes 1, 5 and 10.
 

 
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Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans. To determine fair value, we use our internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available and independent appraisals, as appropriate.
 
Commercial aircraft are a significant concentration of assets in GE Infrastructure, and are particularly subject to market fluctuations. Therefore, we test recoverability of each aircraft in our operating lease portfolio at least annually. Additionally, we perform quarterly evaluations in circumstances such as when aircraft are re-leased, current lease terms have changed or a specific lessee’s credit standing changes. We consider market conditions, such as the continued global shortage of commercial aircraft. Estimates of future rentals and residual values are based on historical experience and information received routinely from independent appraisers. Estimated cash flows from future leases are reduced for expected downtime between leases and for estimated technical costs required to prepare aircraft to be redeployed. Fair value used to measure impairment is based on current market values from independent appraisers.
 
We recognized impairment losses on our operating lease portfolio of commercial aircraft of $0.1 billion in 2007 and 2006. Provision for losses on financing receivables related to commercial aircraft were insignificant in 2007 and 2006.
 
Further information on impairment losses and our exposure to the commercial aviation industry is provided in the Operations – Overview section and in notes 8 and 20.
 
Real Estate. We review our real estate investment portfolio for impairment regularly or when events or circumstances indicate that the related carrying amounts may not be recoverable. Our portfolio is diversified, both geographically and by asset type. However, the global real estate market is subject to periodic cycles that can cause significant fluctuations in market values. While the current estimated value of our GE Commercial Finance Real Estate investments exceeds our carrying value by about $3 billion, the same as last year, downward cycles could adversely affect our ability to realize these gains in an orderly fashion in the future and may necessitate recording impairments.
 
Goodwill and other identified intangible assets. We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a reporting unit. Determining whether an impairment has occurred requires valuation of the respective reporting unit, which we estimate using a discounted cash flow method. For our reporting units, these cash flows are reduced for estimated interest costs. Also, when determining the amount of goodwill to be allocated to a business disposition, we reduce the cash proceeds we receive from the sale by the amount of debt which is allocated to the sold business in order to be consistent with the reporting unit valuation methodology. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.
 

 
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If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case, we supplement the cash flow approach discussed above with independent appraisals, as appropriate. We test other identified intangible assets with defined useful lives and subject to amortization by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.
 
Further information is provided in the Financial Resources and Liquidity – Intangible Assets section and in  notes 1 and 9.
 
Income taxes. Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions including evaluating uncertainties under Financial Accounting Standards Board Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes. We review our tax positions quarterly and adjust the balances as new information becomes available. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carry forwards. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight. Further, our global and diversified business portfolio gives us the opportunity to employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. Amounts recorded for deferred tax assets related to non-U.S. net operating losses, net of valuation allowance were $0.8 billion and $0.7 billion at December 31, 2007 and 2006, respectively. Such year-end 2007 amounts are expected to be fully recoverable within the applicable statutory expiration periods. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
 
Further information on income taxes is provided in the Operations – Overview section and in note 13.
 
Derivatives and Hedging. We use derivatives to manage a variety of risks, including risks related to interest rates, foreign exchange and commodity prices. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The rules and interpretations related to derivatives accounting are complex. Failure to apply this complex guidance correctly will result in all changes in the fair value of the derivative being reported in earnings, without regard to the offsetting changes in the fair value of the hedged item.
 
In evaluating whether a particular relationship qualifies for hedge accounting, we first determine whether the relationship meets the strict criteria to qualify for exemption from ongoing effectiveness testing. For a relationship that does not meet these criteria, we test effectiveness at inception and quarterly thereafter by determining whether changes in the fair value of the derivative offset, within a specified range, changes in the fair value of the hedged item. This test is conducted each reporting period. If fair value changes fail this test, we discontinue applying hedge accounting to that relationship prospectively. Fair values of both the derivative instrument and the hedged item are calculated using internal valuation models incorporating market-based assumptions, subject to third-party confirmation.
 

 
(33)
 

At December 31, 2007, derivative assets and liabilities were $3.1 billion and $2.2 billion, respectively. Further information about our use of derivatives is provided in notes 11, 15 and 18.
 
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will materially exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators.
 
Further information is provided in note 20.
 
Other Information
 
New Accounting Standards
 
On September 15, 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, which defines fair value, establishes a new framework for measuring that value and expands disclosures about fair value measurements. Broadly, SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 established market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. SFAS 157 will require, among other things, expanded disclosure about fair value measurements that have a significant portion of the value determined using unobservable inputs (level 3 measurements). The standard applies prospectively to new fair value measurements performed after the required effective dates, which are as follows: on January 1, 2008, the standard applied to our measurements of the fair values of financial instruments and recurring fair value measurements of non-financial assets and liabilities; on January 1, 2009, the standard will apply to all remaining fair value measurements, including non-recurring measurements of non-financial assets and liabilities such as measurement of potential impairments of goodwill, other intangible assets and other long-lived assets. It also will apply to fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. On January 18, 2008, the FASB issued proposed FASB Staff Position (FSP) FAS 157-c, Measuring Liabilities under Statement 157, which will modify the definition of fair value by requiring estimation of the proceeds that would be received if the entity were to issue the liability at the measurement date. Further revisions to the measurement guidance are possible and we are monitoring emerging interpretations and developments. SFAS 157 will not have a material effect on our earnings or financial position and will have no effect on our cash flows.
 
On February 15, 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. Under this standard, we may elect to report individual financial instruments and certain other items at fair value with changes in value reported in operations. Once made, this election is irrevocable for those items. SFAS 159 was effective for us on January 1, 2008, and we made the election for $0.2 billion of assets.
 
On December 4, 2007, the FASB issued SFAS 141R, Business Combinations, which we will adopt on January 1, 2009. This standard will significantly change the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:
 
·
Transaction costs will generally be expensed. Certain such costs are presently treated as costs of the acquisition.
 

 
(34)
 

·
In-process research and development (IPR&D) will be accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. IPR&D is presently expensed at the time of the acquisition.
 
·
Contingencies, including contingent consideration, will generally be recorded at fair value with subsequent adjustments recognized in operations. Contingent consideration is presently accounted for as an adjustment of purchase price.
 
·
Decreases in valuation allowances on acquired deferred tax assets will be recognized in operations. Such changes previously were considered to be subsequent changes in consideration and were recorded as decreases in goodwill.
 
Generally, the effects of SFAS 141R will depend on future acquisitions.
 
On December 4, 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which we will adopt on January 1, 2009. This standard will significantly change the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. After adoption, noncontrolling interests ($1.6 billion and $2.0 billion at December 31, 2007 and 2006, respectively) will be classified as shareowner’s equity, a change from its current classification between liabilities and shareowner’s equity. Earnings attributable to minority interests ($0.2 billion, $0.3 billion and $0.2 billion in 2007, 2006 and 2005, respectively) will be included in net earnings. Purchases and sales of minority interests will be reported in equity, deferring, perhaps permanently, our recognition of the economic gain or loss on partial dispositions. Gains on sales of minority interests that would not have been in net earnings under SFAS 160 amounted to $0.1 billion in 2007 and 2006.
 
Supplemental Information
 
Financial Measures that Supplement Generally Accepted Accounting Principles
 
We sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with GAAP. Certain of these data are considered “non-GAAP financial measures” under SEC rules. Specifically, we have referred to:
 
•
Average total shareowner’s equity, excluding effects of discontinued operations
 
•
Delinquency rates on certain financing receivables of the GE Commercial Finance and GE Money segments for 2007, 2006 and 2005
 
The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures follow.
 

 
(35)
 

Average Total Shareowner’s Equity, Excluding Effects of Discontinued Operations(a)
 
December 31 (In millions)
2007
  
2006
  
2005
  
2004
  
2003
  
                               
Average total shareowner’s equity(b)
$
58,560
  
$
53,769
  
$
53,460
  
$
49,403
  
$
43,954
  
Less the effects of
                              
Cumulative earnings from
                              
discontinued operations
  
–
    
–
    
2,725
    
4,131
    
2,788
  
Average net investment in discontinued
                              
operations
  
(158
)
  
1,243
    
1,780
    
–
    
–
  
Average total shareowner’s equity, excluding
                              
effects of discontinued operations(a)
$
58,718
  
$
52,526
  
$
48,955
  
$
45,272
  
$
41,166
  
                               

(a)
Used for computing return on average shareowner’s equity shown in the Selected Financial Data section.
  
(b)
On an annual basis, calculated using a five-point average.
  

 
U.S. GAAP requires earnings of discontinued operations to be displayed separately in the Statement of Earnings. Accordingly, the numerators used in our calculations of returns on average shareowner’s equity, presented in the Selected Financial Data section, exclude those earnings (losses). Further, we believe that it is appropriate to exclude from the denominators, specifically the average total shareowner’s equity component, the cumulative effect of those earnings for each of the years for which related discontinued operations were presented, as well as our average net investment in discontinued operations since the second half of 2005. Had we disposed of these operations before mid-2005, proceeds would have been applied to reduce parent-supported debt; however, since parent-supported debt was retired in the first half of 2005, we have assumed that any proceeds after that time would have been distributed to our shareowner by means of dividends, thus reducing average total shareowner’s equity.
 
Delinquency Rates on Certain Financing Receivables
 
Delinquency rates on managed GE Commercial Finance equipment loans and leases and managed GE Money financing receivables follow.
 
GE Commercial Finance
 
December 31
2007
  
2006
  
2005
  
             
Managed
1.21
%
1.22
%
1.31
%
Off-book
0.71
  
0.52
  
0.76
  
On-book
1.33
  
1.42
  
1.53
  

 

 
(36)
 

GE Money
 
December 31
2007
  
2006
  
2005
  
             
Managed
5.36
%
5.21
%
5.34
%
U.S.
5.52
  
4.93
  
5.00
  
Non-U.S.
5.30
  
5.32
  
5.47
  
Off–book
6.59
  
5.49
  
5.28
  
U.S.
6.64
  
5.49
  
5.28
  
Non-U.S.
(a
)
(a
)
(a
)
On–book
5.20
  
5.19
  
5.35
  
U.S.
4.78
  
4.70
  
4.89
  
Non-U.S.
5.31
  
5.32
  
5.47
  

(a)
Not meaningful.
  

 
The increase in off-book delinquency for GE Money in the U.S. from 5.49% at December 31, 2006, to 6.64% at December 31, 2007, reflects both a change in the mix of the receivables securitized during 2007 – for example, our Care Credit receivables which generally have a higher delinquency rate than our core private label credit card portfolio – as well as the rise in delinquency across the broader portfolio of U.S. credit card receivables.
 
We believe that delinquency rates on managed financing receivables provide a useful perspective on our on and off-book portfolio quality and are key indicators of financial performance.
 
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Information about our global risk management can be found in the Operations – Global Risk Management and Financial Resources and Liquidity – Exchange Rate and Interest Rate Risks sections of Item 7.
 

 
(37)
 

 
Item 8. Financial Statements and Supplementary Data.
 
 
Report of Independent Registered Public Accounting Firm


To the Board of Directors of
General Electric Capital Corporation:

We have audited the accompanying statement of financial position of General Electric Capital Corporation and consolidated affiliates (“GECC”) as of December 31, 2007 and 2006, and the related statements of earnings, changes in shareowner’s equity and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15. We also have audited GECC’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). GECC’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the financial position of GECC as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, GECC maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
(38)
As discussed in note 1 to the consolidated financial statements, GECC, in 2007, changed its method of accounting for a change or projected change in the timing of cash flows relating to income taxes generated by leveraged lease transactions.  In 2006, GECC changed its method of accounting for pension and other post retirement benefits.






/s/ KPMG LLP
KPMG LLP
Stamford, Connecticut
February 20, 2008


 
(39)
 

General Electric Capital Corporation and consolidated affiliates
 
Statement of Earnings
 
For the years ended December 31 (In millions)
2007
  
2006
  
2005
  
                   
Revenues
                  
Revenues from services (note 3)
$
66,531
  
$
55,373
  
$
48,851
  
Sales of goods
  
718
    
2,384
    
2,528
  
Total revenues
  
67,249
    
57,757
    
51,379
  
                   
Costs and expenses
                  
Interest
  
22,305
    
17,531
    
13,826
  
Operating and administrative (note 4)
  
18,035
    
16,296
    
15,421
  
Cost of goods sold
  
628
    
2,204
    
2,369
  
Investment contracts, insurance losses and insurance annuity benefits 
  
682
    
641
    
933
  
Provision for losses on financing receivables (note 7)
  
4,603
    
3,066
    
3,262
  
Depreciation and amortization (note 8)
  
8,096
    
6,455
    
5,943
  
Minority interest in net earnings of consolidated affiliates
  
229
    
262
    
155
  
Total costs and expenses
  
54,578
    
46,455
    
41,909
  
                   
Earnings from continuing operations before income taxes
  
12,671
    
11,302
    
9,470
  
Provision for income taxes (note 13)
  
(714
)
  
(1,171
)
  
(967
)
                   
Earnings from continuing operations
  
11,957
    
10,131
    
8,503
  
Earnings (loss) from discontinued operations, net of taxes (note 2)
  
(2,142
)
  
255
    
1,423
  
Net earnings
$
9,815
  
$
10,386
  
$
9,926
  
                   
                   
Statement of Changes in Shareowner’s Equity
                  
                   
(In millions)
2007
  
2006
  
2005
  
Changes in shareowner’s equity (note 15)
                  
Balance at January 1
$
56,585
  
$
50,190
  
$
54,038
  
Dividends and other transactions with shareowner
  
(6,769
)
  
(6,231
)
  
(11,101
)
Changes other than transactions with shareowner
                  
Investment securities – net
  
(506
)
  
(263
)
  
(230
)
Currency translation adjustments – net
  
2,559
    
2,466
    
(2,501
)
Cash flow hedges – net
  
(550
)
  
168
    
81
  
Benefit plans – net
  
173
    
(12
)
  
(23
)
Total changes other than earnings
  
1,676
    
2,359
    
(2,673
)
Increases attributable to net earnings
  
9,815
    
10,386
    
9,926
  
Total changes other than transactions with shareowner
  
11,491
    
12,745
    
7,253
  
Cumulative effect of changes in accounting principles(a)
  
(77
)
  
(119
)
  
–
  
Balance at December 31
$
61,230
  
$
56,585
  
$
50,190
  
                   

(a)
The effect of the 2006 accounting change was previously included in the caption “Benefit plans – net.”
  

See accompanying notes.
  

 
(40)
 

General Electric Capital Corporation and consolidated affiliates
 
Statement of Financial Position
 
At December 31 (In millions, except share amounts)
2007
  
2006
  
             
Assets
            
Cash and equivalents
$
8,623
  
$
9,672
  
Investment securities (note 5)
  
20,740
    
21,325
  
Inventories
  
63
    
54
  
Financing receivables – net (notes 6 and 7)
  
380,004
    
323,943
  
Other receivables
  
28,721
    
35,896
  
Property, plant and equipment – net (note 8)
  
63,692
    
57,908
  
Goodwill (note 9)
  
25,251
    
22,578
  
Other intangible assets – net (note 9)
  
4,074
    
2,627
  
Other assets (note 10)
  
82,515
    
58,543
  
Assets of discontinued operations (note 2)
  
6,703
    
11,119
  
Total assets
$
620,386
  
$
543,665
  
             
Liabilities and equity
            
Short-term borrowings (note 11)
$
186,770
  
$
168,894
  
Accounts payable
  
14,575
    
15,436
  
Long-term borrowings (note 11)
  
309,233
    
256,807
  
Investment contracts, insurance liabilities and insurance annuity benefits (note 12)
  
12,311
    
12,418
  
Other liabilities
  
25,683
    
20,242
  
Deferred income taxes (note 13)
  
7,637
    
11,080
  
Liabilities of discontinued operations (note 2)
  
1,340
    
201
  
Total liabilities
  
557,549
    
485,078
  
             
Minority interest in equity of consolidated affiliates (note 14)
  
1,607
    
2,002
  
             
Common stock, $14 par value (4,166,000 shares authorized at
December 31, 2007 and 2006, and 3,985,403 shares issued
and outstanding at December 31, 2007 and 2006)
  
56
    
56
  
Accumulated gains (losses) – net
            
Investment securities
  
(25
)
  
481
  
Currency translation adjustments
  
7,368
    
4,809
  
Cash flow hedges
  
(749
)
  
(199
)
Benefit plans
  
(105
)
  
(278
)
Additional paid-in capital
  
14,172
    
14,088
  
Retained earnings
  
40,513
    
37,628
  
Total shareowner’s equity (note 15)
  
61,230
    
56,585
  
Total liabilities and equity
$
620,386
  
$
543,665
  
             

The sum of accumulated gains (losses) on investment securities, currency translation adjustments, cash flow hedges and benefit plans constitutes “Accumulated nonowner changes other than earnings,” as shown in note 15, and was $6,489 million and $4,813 million at December 31, 2007 and 2006, respectively.
  
See accompanying notes.
  

 

 
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General Electric Capital Corporation and consolidated affiliates
 
Statement of Cash Flows
 
For the years ended December 31 (In millions)
2007
  
2006
  
2005
  
                   
Cash flows – operating activities
                  
Net earnings
$
9,815
  
$
10,386
  
$
9,926
  
Loss (earnings) from discontinued operations
  
2,142
    
(255
)
  
(1,423
)
Adjustments to reconcile net earnings to cash provided
                  
from operating activities
                  
Depreciation and amortization of property, plant and equipment
  
8,096
    
6,455
    
5,943
  
Deferred income taxes
  
(313
)
  
590
    
(1,088
)
Decrease (increase) in inventories
  
2
    
(23
)
  
30
  
Increase (decrease) in accounts payable
  
(351
)
  
1,016
    
(1,981
)
Provision for losses on financing receivables
  
4,603
    
3,066
    
3,262
  
All other operating activities (note 16)
  
(235
)
  
410
    
2,270
  
Cash from operating activities – continuing operations
  
23,759
    
21,645
    
16,939
  
Cash from (used for) operating activities – discontinued operations
  
3,897
    
(2,115
)
  
5,429
  
Cash from operating activities
  
27,656
    
19,530
    
22,368
  
                   
Cash flows – investing activities
                  
Additions to property, plant and equipment
  
(15,006
)
  
(12,910
)
  
(11,176
)
Dispositions of property, plant and equipment
  
8,322
    
6,072
    
5,511
  
Net increase in financing receivables (note 16)
  
(44,567
)
  
(38,679
)
  
(16,590
)
Proceeds from sales of discontinued operations
  
117
    
3,663
    
7,281
  
Proceeds from principal business dispositions
  
1,699
    
386
    
209
  
Payments for principal businesses purchased
  
(7,570
)
  
(7,299
)
  
(7,167
)
All other investing activities (note 16)
  
(2,230
)
  
(14,193
)
  
1,870
  
Cash used for investing activities – continuing operations
  
(59,235
)
  
(62,960
)
  
(20,062
)
Cash from (used for) investing activities – discontinued operations
  
(3,784
)
  
1,953
    
(6,972
)
Cash used for investing activities
  
(63,019
)
  
(61,007
)
  
(27,034
)
                   
Cash flows – financing activities
                  
Net increase (decrease) in borrowings (maturities of 90 days or less)
  
2,146
    
10,025
    
(5,082
)
Newly issued debt (maturities longer than 90 days) (note 16)
  
92,046
    
90,038
    
65,869
  
Repayments and other reductions (maturities longer
                  
than 90 days) (note 16)
  
(52,662
)
  
(48,923
)
  
(48,837
)
Dividends paid to shareowner
  
(6,695
)
  
(7,904
)
  
(8,614
)
All other financing activities (note 16)
  
(408
)
  
1,918
    
(2,554
)
Cash from financing activities – continuing operations
  
34,427
    
45,154
    
782
  
Cash from (used for) financing activities – discontinued operations
  
(6
)
  
(10
)
  
226
  
Cash from financing activities
  
34,421
    
45,144
    
1,008
  
                   
Increase (decrease) in cash and equivalents during year
  
(942
)
  
3,667
    
(3,658
)
Cash and equivalents at beginning of year
  
9,849
    
6,182
    
9,840
  
Cash and equivalents at end of year
  
8,907
    
9,849
    
6,182
  
Less cash and equivalents of discontinued operations at end of year
  
284
    
177
    
349
  
Cash and equivalents of continuing operations at end of year
$
8,623
  
$
9,672
  
$
5,833
  
                   
Supplemental disclosure of cash flows information
                  
Cash paid during the year for interest
$
(21,419
)
$
(14,879
)
$
(15,056
)
Cash recovered (paid) during the year for income taxes
  
1,158
    
(886
)
  
(2,459
)
                   

See accompanying notes.


 
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General Electric Capital Corporation and consolidated affiliates
 
Notes to Consolidated Financial Statements
 
Note 1. Summary of Significant Accounting Policies
 
Accounting principles
 
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP).
 
Consolidation
 
All of our outstanding common stock is owned by General Electric Capital Services, Inc. (GE Capital Services or GECS), all of whose common stock is owned, directly or indirectly, by General Electric Company (GE Company or GE). Our financial statements consolidate all of our affiliates – companies that we control and in which we hold a majority voting interest. Associated companies are companies that we do not control but over which we have significant influence, most often because we hold a shareholder voting position of 20% to 50%. Results of associated companies are presented on a one-line basis. Investments in and advances to associated companies are presented on a one-line basis in the caption “Other assets” in our Statement of Financial Position, net of allowance for losses that represents our best estimate of probable losses inherent in such assets.
 
Financial statement presentation
 
We have reclassified certain prior-year amounts to conform to the current year’s presentation.
 
Financial data and related measurements are presented in the following categories:
 
•
Consolidated This represents the adding together of all affiliates, giving effect to the elimination of transactions between affiliates.
 
•
Operating Segments These comprise our three businesses, focused on the broad markets they serve: GE Commercial Finance, GE Money, and GE Infrastructure. For segment reporting purposes, certain financial services businesses including Aviation Financial Services, Energy Financial Services and Transportation Finance are reported in the GE Infrastructure segment because GE Infrastructure actively manages such businesses and reports their results for internal performance measurement purposes. During the fourth quarter of 2007, we transferred the Equipment Services business from the GE Industrial segment to the GE Commercial Finance segment, where a portion of the business is reported in Capital Solutions. Prior period information has been reclassified to be consistent with the current organization.
 
Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations. Certain of our operations have been presented as discontinued. See note 2.
 
The effects of translating to U.S. dollars the financial statements of non-U.S. affiliates whose functional currency is the local currency are included in shareowner’s equity. Asset and liability accounts are translated at year-end exchange rates, while revenues and expenses are translated at average rates for the respective periods.
 
Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.
 

 
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Sales of goods
 
We record all sales of goods only when a firm sales agreement is in place, delivery has occurred and collectibility of the fixed or determinable sales price is reasonably assured. If customer acceptance of goods is not assured, we record sales only upon formal customer acceptance.
 
Revenues from services (earned income)
 
We use the interest method to recognize income on all loans. Interest on loans includes origination, commitment and other non-refundable fees related to funding (recorded in earned income on the interest method). We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due. We recognize interest income on nonearning loans either as cash is collected or on a cost-recovery basis as conditions warrant. We resume accruing interest on nonearning, non-restructured commercial loans only when (a) payments are brought current according to the loan’s original terms and (b) future payments are reasonably assured. When we agree to restructured terms with the borrower, we resume accruing interest only when reasonably assured that we will recover full contractual payments, and such loans pass underwriting reviews equivalent to those applied to new loans. We resume accruing interest on nonearning consumer loans when the customer’s account is less than 90 days past due.
 
We recognize financing lease income on the interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease inception represent our initial estimates of the fair value of the leased assets at the expiration of the lease and are based primarily on independent appraisals, which are updated periodically. Guarantees of residual values by unrelated third parties are considered part of minimum lease payments. Significant assumptions we use in estimating residual values include estimated net cash flows over the remaining lease term, anticipated results of future remarketing, and estimated future component part and scrap metal prices, discounted at an appropriate rate.
 
We recognize operating lease income on a straight-line basis over the terms of underlying leases.
 
Fees include commitment fees related to loans that we do not expect to fund and line-of-credit fees. We record these fees in earned income on a straight-line basis over the period to which they relate. We record syndication fees in earned income at the time related services are performed, unless significant contingencies exist.
 
Depreciation and amortization
 
The cost of our equipment leased to others on operating leases is amortized on a straight-line basis to estimated residual value over the lease term or over the estimated economic life of the equipment.
 
The cost of individually significant customer relationships is amortized in proportion to estimated total related sales; cost of other intangible assets is amortized on a straight-line basis over the asset’s estimated economic life. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. See notes 8 and 9.
 
Losses on financing receivables
 
Our allowance for losses on financing receivables represents our best estimate of probable losses inherent in the portfolio. Our method of calculating estimated losses depends on the size, type and risk characteristics of the related receivables. Write-offs are deducted from the allowance for losses and subsequent recoveries are added. Impaired financing receivables are written down to the extent that we judge principal to be uncollectible.
 

 
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Our portfolio consists entirely of homogenous consumer loans and of commercial loans and leases. The underlying assumptions, estimates and assessments we use to provide for losses are continually updated to reflect our view of current conditions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible to experience credit losses that are different from our current estimates.
 
Our consumer loan portfolio consists of smaller balance, homogenous loans including card receivables, installment loans, auto loans and leases and residential mortgages. We collectively evaluate each portfolio for impairment. The allowance for losses on these receivables is established through a process that estimates the probable losses inherent in the portfolio based upon statistical analyses of portfolio data. These analyses include migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, together with other analyses that reflect current trends and conditions. We also consider overall portfolio indicators including nonearning loans, trends in loan volume and lending terms, credit policies and other observable environmental factors.
 
We write off unsecured closed-end installment loans at 120 days contractually past due and unsecured open-ended revolving loans at 180 days contractually past due. We write down consumer loans secured by collateral other than residential real estate to the fair value of the collateral, less costs to sell, when such loans are 120 days past due. Consumer loans secured by residential real estate (both revolving and closed-end loans) are written down to the fair value of collateral, less costs to sell, no later than when they become 360 days past due. During 2007, we conformed our reserving methodology in our residential mortgage loan portfolios. Unsecured consumer loans in bankruptcy are written off within 60 days of notification of filing by the bankruptcy court or within contractual write-off periods, whichever occurs earlier.
 
Our commercial loan and lease portfolio consists of a variety of loans and leases, including both larger balance, non-homogenous loans and leases and smaller balance homogenous commercial and equipment loans and leases. Losses on such loans and leases are recorded when probable and estimable. We routinely survey our entire portfolio for potential specific credit or collection issues that might indicate an impairment. For larger balance, non-homogenous loans and leases, this survey first considers the financial status, payment history, collateral value, industry conditions and guarantor support related to specific customers. Any delinquencies or bankruptcies are indications of potential impairment requiring further assessment of collectibility. We routinely receive financial as well as rating agency reports on our customers, and we elevate for further attention those customers whose operations we judge to be marginal or deteriorating. We also elevate customers for further attention when we observe a decline in collateral values for asset-based loans. While collateral values are not always available, when we observe such a decline, we evaluate relevant markets to assess recovery alternatives – for example, for real estate loans, relevant markets are local; for aircraft loans, relevant markets are global. We provide allowances based on our evaluation of all available information, including expected future cash flows, fair value of collateral, net of disposal costs, and the secondary market value of the financing receivables. After providing for specific incurred losses, we then determine an allowance for losses that have been incurred in the balance of the portfolio but cannot yet be identified to a specific loan or lease. This estimate is based on historical and projected default rates and loss severity, and it is prepared by each respective line of business.
 
Experience is not available with new products; therefore, while we are developing that experience, we set loss allowances based on our experience with the most closely analogous products in our portfolio.
 
When we repossess collateral in satisfaction of a loan, we write down the receivable against the allowance for losses. Repossessed collateral is included in the caption “Other assets” in the Statement of Financial Position and carried at the lower of cost or estimated fair value less costs to sell.
 

 
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The remainder of our commercial loans and leases are portfolios of smaller balance homogenous commercial and equipment positions that we evaluate collectively by portfolio for impairment based upon various statistical analyses considering historical losses and aging.
 
Partial sales of business interests
 
We record gains or losses on sales of their own shares by affiliates except when realization of gains is not reasonably assured, in which case we record the results in shareowner’s equity.
 
Cash and equivalents
 
Debt securities with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.
 
Investment securities
 
We report investments in debt and marketable equity securities, and equity securities in our insurance portfolio, at fair value based on quoted market prices or, if quoted prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. Unrealized gains and losses on available-for-sale investment securities are included in shareowner’s equity, net of applicable taxes and other adjustments. We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of that market decline, our intent and ability to hold to maturity or until forecasted recovery, and the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses are accounted for on the specific identification method. Unrealized gains and losses on investment securities classified as trading and certain retained interests are included in earnings.
 
Inventories
 
All inventories are stated at the lower of cost or realizable values. Our inventories consist of finished products held for sale; cost is determined on a first-in, first-out basis.
 
Intangible assets
 
We do not amortize goodwill, but test it annually for impairment using a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds its fair value. We use discounted cash flows to establish fair values. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. When all or a portion of a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value method.
 
We amortize the cost of other intangibles over their estimated useful lives. The cost of intangible assets is amortized on a straight-line basis over the asset’s estimated economic life. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values.
 

 
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Investment contracts, insurance liabilities and insurance annuity benefits
 
Certain entities, which we consolidate, provide guaranteed investment contracts to states, municipalities and municipal authorities.
 
Our insurance activities also include providing insurance and reinsurance for life and health risks and providing certain annuity products. Three product groups are provided: traditional insurance contracts, investment contracts and universal life insurance contracts. Insurance contracts are contracts with significant mortality and/or morbidity risks, while investment contracts are contracts without such risks. Universal life insurance contracts are a particular type of long-duration insurance contract whose terms are not fixed and guaranteed.
 
For short-duration insurance contracts, including accident and health insurance, we report premiums as earned income over the terms of the related agreements, generally on a pro-rata basis. For traditional long-duration insurance contracts including term, whole life and annuities payable for the life of the annuitant, we report premiums as earned income when due.
 
Premiums received on investment contracts (including annuities without significant mortality risk) and universal life contracts are not reported as revenues but rather as deposit liabilities. We recognize revenues for charges and assessments on these contracts, mostly for mortality, contract initiation, administration and surrender. Amounts credited to policyholder accounts are charged to expense.
 
Liabilities for traditional long-duration insurance contracts represent the present value of such benefits less the present value of future net premiums based on mortality, morbidity, interest and other assumptions at the time the policies were issued or acquired. Liabilities for investment contracts and universal life policies equal the account value, that is, the amount that accrues to the benefit of the contract or policyholder including credited interest and assessments through the financial statement date.
 
Liabilities for unpaid claims and claims adjustment expenses represent our best estimate of the ultimate obligations for reported and incurred-but-not-reported claims and the related estimated claim settlement expenses. Liabilities for unpaid claims and claims adjustment expenses are continually reviewed and adjusted through current operations.
 
Accounting changes
 
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes, and FASB Staff Position (FSP) FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction. Among other things, FIN 48 requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. FSP FAS 13-2 requires recalculation of returns on leveraged leases when there is a change in the timing or projected timing of cash flows relating to income taxes associated with such leases. The January 1, 2007, transition reduced our retained earnings by $77 million, all of which was associated with FSP FAS 13-2 and decreased financing receivables – net.
 
On January 1, 2007, we adopted FASB Statement of Financial Accounting Standards (SFAS) 155, Accounting for Certain Hybrid Financial Instruments. This statement amended SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended to include within its scope prepayment features in newly created or acquired retained interests related to securitizations. SFAS 155 changed the basis on which we recognize earnings on these retained interests from level yield to fair value. See notes 5 and 19.
 

 
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SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, became effective for us as of December 31, 2006, and requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension and other postretirement benefit plans such as retiree health and life, with current-year changes in the funded status recognized in shareowner’s equity. SFAS 158 did not change the existing criteria for measurement of periodic benefit costs, plan assets or benefit obligations. The incremental effect of the initial adoption of SFAS 158 reduced our shareowner’s equity at December 31, 2006, by $119 million.
 
Note 2. Discontinued Operations
 
We classified our Japanese personal loan business (Lake), our U.S. mortgage business (WMC), GE Life and Genworth Financial, Inc. (Genworth) as discontinued operations. Associated results of operations, financial position and cash flows are separately reported for all periods presented.
 
WMC
 
In December 2007, we completed the sale of our U.S. mortgage business for $117 million in cash. In connection with the transaction, certain contractual obligations and potential liabilities related to previously sold loans were retained. We sold this business because of continued pressures in the U.S. subprime mortgage industry. As a result, we recognized an after-tax loss of $62 million during 2007. WMC revenues from discontinued operations were ($1,424) million, $536 million and $607 million in 2007, 2006 and 2005, respectively. In total, WMC’s loss from discontinued operations, net of taxes, was $987 million in 2007, compared with earnings of $29 million and $122 million in 2006 and 2005, respectively.
 
Lake
 
In September 2007, we committed to a plan to sell our Lake business. We made the decision to sell this business upon determining that, despite restructuring, Japanese regulatory limits for interest charges on unsecured personal loans did not permit us to earn an acceptable return. We are actively pursuing a buyer and expect to complete the sale of this business by the end of the third quarter of 2008. In connection with this exit, we recorded an after-tax loss of $908 million in 2007, which represents the difference between the net book value of our Lake business and the projected sale price. Lake revenues from discontinued operations were $1,056 million, $1,440 million and $1,737 million in 2007, 2006 and 2005, respectively. In total, Lake’s loss from discontinued operations, net of taxes, was $1,231 million in 2007, compared with earnings of $211 million and $401 million in 2006 and 2005, respectively.
 
GE Life